The need and the relevance of sector-specific deductions in the Indian income tax act: the role of section 10A in the Indian software sector growth

Abstract

The liberalization of the Indian Economy was a very significant development . It brought in much needed foreign investment and saw the rise of service sector and manufacturing as well. The liberalization also heralded a new age wherein many Indian software engineers turned entrepreneurs and founded many software development firms. Also, Indian business houses saw great potential in the software industry and they invested significantly in their own IT companies. Post liberalization , these companies saw steady rise in turnover and export of software to various countries in the west. The IT sector became a major contributor to the Indian economy in terms of revenues and employment. This rise of the software sector and associated activities was not sudden and totally unplanned. The role of government infrastructure support and tax incentives were also very critical in ensuring that this sector attracts steady investment and maintains a sustained growth over the years. It is important to examine the effect of the government support in terms of the tax incentives and relate them to the financial and operational growth of the IT companies operating out of India. It is interesting to have a peek into the success stories of the IT companies and discuss how the tax savings influenced their growth and expansion over the years. Thus, it would also be useful to deliberate upon the public policy issues pertaining to tax policy and sectoral growth in an economy . The tax laws have not been merely an instrument to shore up state revenues but through various deductions/exemptions/tax holidays , the government from time to time had triggered growth in various sunrise sectors of the economy. It would be worth examining the role of deductions offered under sections 10A, 10AA and 10B of the Indian Income Tax Act, 1961, in encouraging the growth of IT industry in India and development of software exports from the country. Also, it would in order to discuss the efficacy of Tax Holidays as a public policy initiative by the government to boost nascent industries and sectors.