The SEZ vs STPI debate

I'm continuing my learning on setting up an India Development Center, after a gap of few weeks.

Once it was decided that I'd be joining this set-up, I started to get the center incorporated, which is the first step. And the first decision was whether to be in a SEZ or whether to get into STPI. Here is a debate on SEZ vs STPI.

My main concern for registering under SEZ is that typically such units are on the outskirts and commute is going to be a major factor. Also, I'm not too confident that any SEZ would even entertain us for our requirements of 3-4K sq.ft. SEZs are typically for huge operations of >1K enggs. On the other hand, any building in the country could be "bonded" under STPI and we will enjoy tax benefits anyways till 31-Mar-2010 (whether or not this would continue beyond this date is pure speculation as we will have a new govt early next year, which would take the final decision).

Here are some technical points we need to keep in mind:

1. The STPI Unit is Exempt from payment of Income Tax U/s 10A upto 31.03.2010. This means any profit earned after 01.04.2010 will be taxed in the hands of STPI. A SEZ Unit will be exempt U/s 10AA from 100% Tax exemption for First 5 years after commercial production- & 50% of profits are exempt for the next 5 years (subject to certain conditions)
2. Eventhough an STPI Unit is exempt from payment of tax as aforesaid in point 1- It still needs to pay Minimum Alternate TAX (MAT)- In effect 10% of its books profit effectively will be paid out as MAT which can be treated as advance tax and set off when it pays regular income tax after 01.04.2010. A SEZ unit will be exempt even from payment of MAT.
3. An STPI unit when Distribute dividends to its shareholders will have to pay a Dividend Distribution Tax (DDT) of 12.5%- However an SEZ unit will be exempt from payment of DDT.
4. The input services received by an Export Unit under the STPI Scheme will have to opt for Refund/Rebate of Service Tax paid. In other words, when an STPI units pays service tax for Rent, Professional charges, consultant fee etc.,- They have to pay the service tax and ask for a refund which is very cumbersome and difficult to get back. Therefore there will be cash flow issues. SEZ unit will be exempt from payment of service tax on inputs services. In other words, the vendor will not even charge Service tax to an SEZ Unit.
5. The SEZ unit has to be located only in the designated SEZ. Under STPI Scheme the unit can be located anywhere in India. Custom bonding will be carried out for STPI units so that duty free imported goods can be bonded.

Having listed the comparison- there are certain points that needs to be kept in mind.

• A Small company wanting to grow to less than 25-30 people, would find it difficult to get an area in SEZ of about 3-4K sq ft Area. The rentals are also on the higher side.
  
• Employee Travel costs to/from SEZ would be an additional cost for the company as generally SEZ's are located at far off places. Since we are a small unit and typically have enggs coming in all parts of Bangalore, the costs of transportation would be lot higher than an organization like say Accenture which has thousands of employees.
  
• NASSCOM is lobbying in a big way to extend the sun-set cluase of Sec 10A. Originally the exemption is supposed to have been ended on 31.03.2009, However, the Govt has extended that by one year to 31.03.2010. In all likelihood, after the fresh election, the exemption will continue for some time atleast for Small and Medium software companies.. ( Please note this is speculative)
• STPI as Quasi Judicial administrator has taken extremely company friendly steps. STPI approvals/permissions are generally given across the table and they work on a strict SLA's.SEZ's being controlled by Development commissioner's one is not sure of how effectively/efficiently they will be able to help the Units.. (Red tapism?) Again my Guess.

Based on all these things we felt that we may not save much by taking the SEZ route and decided to go with STPI, with which we are little more comfortable.