Indian IT steps beyond sops, tax incentives

Written by P P Thimmaya | Updated: Feb 25 2013, 17:28pm hrs
The sector is looking at the Budget that can streamline regulatory procedures and improve investment climate needed for next level of growth. The industry is seeking certain long-term directions from the government especially in areas such as investments into research & development, entrepreneurship and innovation which would result in garnering some crucial advantage for the technology sector in the country

The Indian information technology (IT) industry with a size in excess of over $100 billion is now at a stage where mere tax incentives or sops would not actually spur the sector. Instead broad policy initiatives in the forthcoming Union Budget in addressing issues like infrastructure, e-governance or health will have a longer term bearing on the sector.

The IT industry in India which grew very rapidly over the last two decades given its inherent strengths of cost competitiveness with a large technical talent pool, not to forget the favourable tax regime, is now at a crossroads as the changed economic scenario has called for new business models to meet different kinds of demand.

Partha Iyengar, country manager Research, India, Gartner, said, The IT industry has reached a tipping point in terms of scale and maturity today, where the issues it is grappling with as the next impediment to growth do not have much to do with granular industry level issues like taxation, sops etc. The issues that will enable or inhibit the next level of growth for the industry have to do with fundamental issues like infrastructure improvement, education, skills development, streamlined regulatory procedures and improving the investment climate. Therefore I would look at an increased focus on budget allocations or clarity of future direction of the government on these macro issues as the new indicators for the future success of the IT industry.

Today, industry is seeking certain long-term directions from the government especially in areas such as investments into research & development, entrepreneurship and innovation which would result in far reaching advantages to the technology sector in the country. In its pre-budget wish list, Nasscom has focused on issues related to enabling entrepreneurship, enhancing global competitiveness of the IT-BPM industry, helping India emerge as an innovation hub and meeting growth and development goals.

Nasscom President Som Mittal said that for enabling entrepreneurship the compliance burden has to be eased through the removal of unfair levies and the royalty on internet downloads, which will act as a barrier to usage, needs to be removed retrospectively. PN Sudarshan, senior director, Deloitte in India said, An incentive model to facilitate R&D and innovation would in the long run widen the countrys portfolio from a predominant services position. And a model of community lending/non-collateral financing, particularly from a working capital perspective, could foster the growth of the nascent and younger segment.

Among the big bang kind of reforms that the industry would be expecting from the budget are some of the development goals of introducing policies and allocations that increase ICT-led interventions in healthcare, education and governance. Already the initiative of giving the Aadhar card has spurred the use of technology in e-governance but the industry is hoping that the government would kickstart many of the projects which are still pending the requisite clearances. For example the Electronic Delivery of Services Bill introduced in Parliament in 2011, if passed, could lead to increased adoption of IT which will have an all round beneficial effect. There are also similar projects with other departments like railways, defence and police which have been bogged by indecision.

This is not to say that taxation related issues are not important for the industry. There are many grave matters which are affecting the IT sector in areas such as transfer pricing, tax refunds and most importantly differing interpretations of the various tax laws. The government recently did accept many of the recommendations of the Rangachary Committee which was constituted by the government to look into various issues leading to tax disputes and denial of benefits for the Indian IT industry. Among the various positive clarifications issued by the ministry include those related to taxation of onsite revenues, special economic zones, R&D expenses etc.

However, taxation experts feel that these are welcome measures but most of them fall under the ambit of a executive ordinance that could lead to certain differing interpretations and a seal of approval from the Parliament would go a long way in easing their anxiety. At the same time, there is another segment of the IT industry in India which has been given a poor cousin statushardware sector. The $13 billion hardware sector in India has sought remedial taxation measures from the forthcoming Union Budget to give a boost to the sagging domestic manufacturing segment, otherwise, it has warned that the countrys electronics import bill could touch $320 billion by 2020 overtaking that of oil.

A case in point is the duty structure in India where it is cheaper to import a hardware product as against somebody who imports only the components to be used for manufacturing which ends up being more costlier. MAIT has raised this issue in the past budgets but nothing much has been forthcoming from successive governments. JV Ramamurthy, president, MAIT said, The current internet density and penetration of IT have enough headroom for growth.

The industry is hoping that the Union Budget would set the ball rolling by coming out with various broad policy initiatives which would create an environment for the sector to remain competitive globally and not be dampened by certain retrospective amendments which would drive away investments.