Faced with serious challenges, including fast diminishing cost advantage, the IT and ITes industry wanted an extension of the income-tax holiday, a CII KMPG study said.

Companies wanted continued fiscal support from the government in form of extension of the provisions of section 10 A/10 B of the Income Tax Act 1961, according to the results of the study released on Friday.

The income tax holiday under sections 10 A/10 B are set to expire on March 31, 2010.

According to the study conducted by the Confederation of Indian Industry along with KPMG, the report said the industry was today faced with serious challenges ranging from increasing competition from other sectors, diminishing cost advantage and shortage of trained talent.

The expiry of the tax holiday was among the biggest challenges for the sector followed by increasing costs.

There was a consensus that the expiry of the holiday will result in lowering India's attractive index as the cost of doing business in India will increase. The pressure would be comparatively high on the small and medium companies who among others, may not be able to effectively leverage the SEZ scheme.

Almost two thirds of the respondents to the survey believe that the expiry of the tax holiday will have an adverse effect on recruitment and demand for extension of the holiday was more skewed towards assisting small and mid sized companies.

KPMG is global network of professional services firms fo KPMG International, whose member firms provide audit, tax and advisory functions.