The government is set to extend the blanket tax exemption provided to software companies in order to boost the IT industry, which has become one of the biggest casualties of the global financial crisis. The Software Technology Parks of India (STPI) scheme that grants a ten-year income-tax holiday under Section 10A of the Income-Tax Act is expected to continue beyond its March 2010 deadline in a move that should help smaller players.

India’s top IT companies do not need this support as they have already invested in special economic zones, which offer liberal tax breaks. Extending the STPI scheme will help second-rung companies stay afloat as they cannot afford the fresh capital investment required to migrate to SEZs.

With the economic downturn expected to last well into 2009-10, the proposal to give the sector sops was discussed by the apex committee set up by the government in the aftermath of the global financial crisis. The panel met on Wednesday evening to finalise the modalities of a second stimulus package, expected to be announced next week.

“Extension of the STPI scheme will be a welcome move as next year is expected to be even worse, especially for the BPO sector and small & medium players,” said Ganesh Natarajan, Nasscom chairman and deputy CMD of Zensar Technology Ltd.

While 70% the of the country’s IT exports consist of non-discretionary expenditure such as maintenance contracts, the remaining 30% includes research & development activities, or discretionary spends, in which mainly smaller companies are involved.

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