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India has grown to be a powerhouse in providing Information Technology (IT)
Services to myriad clients all over the world. This sector has shown that it has what it takes to move beyond pure cost arbitrage and up the value chain. Despite the successes of this sector and its prowess in providing world-class solutions, there is empirical evidence which suggests that the domestic user industry remains woefully underserved
for its IT requirements. This study theorises that this is due to the tax-break based incentives provided to the Information Technology Service providers, which have resulted in an environment where servicing the domestic IT users, especially the Micro and Small Scale Enterprises, becomes non-remunerative.
Therefore, domestic industry's use of Information Technology happens without any government aid or ncentive. On the contrary, current government policies result in a number of missed opportunities, rendering Indian businesses uncompetitive.
In this paper, we analyse the impact of export oriented tax incentives on the domestic sector and attempt to identify a few policy mechanisms that could obviate their negative effect.