Tech stakes are high

Written by Diksha Dutta | Diksha Dutta | Updated: Mar 13 2012, 22:49pm hrs
The $72 billion Indian IT-ITES industry is aspirational and needs government support to achieve its targets. The industry has growth projections of $225 billion by 2020 and is set to be amongst the most significant growth

drivers of the economy. In addition to this, the industry is also considered one of the largest employers in the country with almost 22 lakh professionals working for it.

Keeping this in mind, every year, IT

industry forum Nasscom and its members share a list of recommendations with the finance ministry for inclusion in the Finance Bill. The goal is to ensure a regulatory environmentwith more rationalised tax structures, incentives for companies, particularly small and medium businesses (SMB), and software technology parks (STP) and special economic zones (SEZ) that catalyse the growth of the sector.

Nasscom president Som Mittal says, Specifically for IT, we want to give a strong message that the current account deficit has been increasing. We need to promote high value exports and IT software is the best industry to do that. The recommendations are aimed at addressing the critical issues (like the taxation policies) faced by companies.

The issue that has been troubling the IT

industry for long is minimum alternate tax (MAT) on special economic zones (SEZ). MAT at 20% has created hardship on the cash flow position for companies and impacts the re-investment required for growth. Nasscom feels that it should not be more than one-third of the normal tax rate and MAT on SEZ

income should be withdrawn as it is counter to the long-term policy announced by the government through the SEZ Act. Stresses Mittal, We need tax simplification. The government should consider removing MAT on SEZ. The whole SEZ scheme becomes less

efficient because of MAT.

As the onshore model is gaining significance in the IT industry, there are more complications that come with it. With the sunset of STP benefits, there has been denial of tax

deductions for onsite services on one pretext or the other, which the exporters of IT services are entitled to. Nasscom feels that the government needs to issue appropriate clarifications to state that onsite services are an integral part of IT services.

Even from a transfer pricing perspective, the IT industry has been facing several unwarranted assessments on the additions. There is a considerable amount of subjective judgment in arriving at the arms length price of an international transaction

between two associated enterprises. Nasscom believes that the rules should be framed to notify the metrics for making transfer pricing adjustments. Moreover, safe harbour provisions should not have any threshold limits and advance pricing arrangement (APA), the standard international practice, should be introduced to reduce litigation.

Further, ambiguity and lack of clarity with regards to treatment of software being goods or services has resulted in dual taxation. That is, both Central and State authorities have been demanding taxes on supply of software leading to additional burden on the IT industry. This should be looked into by all the governments collectively to arrive at a mutually agreed structure.

Mittal says, We should make policies to encourage younger companies so that they can get funding easily. The new stream of young talent is very promising in the IT industry provided they get enough support and funding. Nasscom wishes to continue to provide platforms to spur the SME

momentum, and work closely with the government and industry to facilitate creation of an environment that is conducive for the emerging start-up landscape.

The IT industry forum has also recommended that like many developed and developing countries, that provide subsidies and incentives to attract investment, the Indian government should introduce similar schemes, such as grants in promoting sustained economic development.

These requests, if met with by the government will ensure that there is more predictability of the tax liability, reduced litigation and disputes and encouragement of future investments. There is need for legislation to be implemented in letter and spirit, so as to deliver the maximum benefits to the IT software industry.

Hopes for hardware

Manufacturers Association of IT Industry (MAIT) agenda for Budget 2012 is simple and straight expand domestic demand,

domestic manufacturing and e-governance. This too has a background: the last year was not very promising for the IT hardware sector. MAIT president Alok Bharadwaj says, Last year was one of the worst years for the IT hardware industry. The prices shot up and the hike still continues. This created problems at the macro level and the expansion plans of the companies were hit.

The local assembled PC market too had problem and experienced only 3% growth over the last year. There was rupee devaluation and it effected the PC market which is still 90% imported. The bottom line of the technology companies was hit and they had to shrink down their investment.

Bhardwaj notes that Indias IT hardware industry was $16 billion in the year 2010-11. Less than one third of this was India manufactured. This must change. Hence providing appropriate incentives for IT manufacturers, finished products and components in India would have a positive impact.

Bharadwaj says, The consumption of IT products is low in our country which is not good for an emerging economy like India. We are highly dependent on imports and are not able to produce enough for own consumption. Of the total IT hardware consumption in the country, local manufacturing is only 10%. He adds that the IT hardware and electronics consumption is expected to reach $400 billion by 2020 and $300 billion will be imported supply in it and $100 billion will be domestic manufactured. If the current

scenario continues, this will create huge pressure on the trade deficit in IT hardware. There needs to be a balance between our manufacturing and imports, he feels.

At the same time, MAIT feels that there should be encouragement of foreign direct

investment (FDI) too. Policies should show higher level of investment in India. At the same time, it must encourage expansion and investment through FDI, he feels. Like

Nasscom, MAIT too wants the government to abolish MAT in the SEZ so that it becomes

attractive for manufacturing companies to

invest in India.

MAIT is stressing that the Indian government should encourage more IT adoption through e-governance and all government services should be made availale online to

citizens. In a nutshell, the government should help in accelerating local demand and MAIT wants a budget that simplifies this demand. The consumer is at present paying higher taxes because of implication of service tax along with VAT. Thus vendors services are getting expensive.

Clearly there are a lot of expectations and tech industry is looking for desired relief. Bharadwaj summarises the industry sentiment: The need of the hour is a budget that is growth-oriented, reforms-oriented and strategy-oriented.