What India must do to nurture tech

Published: January 26, 2018 3:46:21 AM

India’s technology industry is going through a fundamental shift, driven by rapidly evolving market dynamics and the shift towards digital services.

India, tech, technology, technology industry, digital servicesIndia’s technology industry is going through a fundamental shift, driven by rapidly evolving market dynamics and the shift towards digital services.

PN Sudarshan

India’s technology industry is going through a fundamental shift, driven by rapidly evolving market dynamics and the shift towards digital services. As the export market faces headwinds such as softening demand for traditional services, visa restrictions and geopolitical, new opportunities are emerging in exponential technologies such as artificial intelligence, machine learning, robotics and automation, and also in the domestic market in India for technology-led services. India is one of the fastest growing tech markets in APAC, due to large-scale digital transformation of public sector and private sector enterprises, enabled by changing market dynamics and policy interventions. As new-age start-ups use tech as a competitive differentiator to gain advantage over traditional businesses, enterprises across industries are also increasingly adopting tech-enabled solutions to optimise business operations and compete effectively in the market. India is now a stable market of home-grown firms in domains such as ERP, CRM, HCM, etc, which are helping in this transformation by providing cost-effective custom solutions through flexible business models, enabled by cloud computing.

Government initiatives such as Digital India, Smart Cities and the vision to be trillion-dollar digital economy by 2022 provide the policy impetus to strengthen the domestic ecosystem. As per Nasscom, domestic market (excluding hardware) is expected to reach $26 billion in FY18, roughly 11% growth from the previous year. Challenges such as constrained investments in R&D, underdeveloped deep tech ecosystem, dependence on imports for telecom and consumer electronics hardware, and longer implementation cycles for public sector procurement require concerted efforts from industry participants and timely policy interventions to help India leverage the potential of technology industry.

In the context of Global In-house Centres (GICs), the issue of whether some of the functions performed trigger a permanent establishment for the overseas affiliate is an oft-discussed subject. Other litigation issues faced by GICs relate to transfer pricing adjustments for want of higher margin in India, withholding tax on cross-border payments, carry forward of losses in case of a merger, and clarity on applicability of withholding tax on digital transactions. With the multilateral convention being signed under OECD’s Base Erosion and Profit Shifting (BEPS) project, these may need to be revisited. The consumer internet industry, including e-commerce, was estimated to touch $40 billion in 2018 and has seen the largest players reporting growth numbers of 60-80%. Challenges such as dominance of cash payments, internet bandwidth and connectivity, and high cost of logistics have seen significant improvements in the past year, but the industry has had to face a temporary struggle with the GST shift.
Expectations from the Budget

The tax holiday sunset clause in case of SEZs is currently pegged as March 2021. In a developing economy like ours, exports play a critical role, and technology services exports have contributed significantly to economic growth and employment generation. Fresh investment in SEZs could be encouraged to maintain the competitive advantage of the industry, and hence the sunset clause for phasing out benefits to SEZs may be deferred for the time being.

The tax law on digital transactions is an evolving subject, and there are numerous cases pending at various stages in courts on applicability of withholding tax for digital transactions. Significant time and effort is consumed in such tax litigation. It is imperative that the framework of taxation for digital transactions is reviewed and embedded in the tax code to minimise litigation, keeping in mind changing and complex business models, evolving new-age technologies and global principles such as OECD’s BEPS—this would help the rapidly growing digital economy.

In e-commerce, lack of clarity on issues such as tax treatment of advertisement, marketing and promotional (AMP) expenditure, taxation of digital content, withholding of taxes on software, etc, has led to protracted litigation. Clarification on characterisation of e-commerce transactions for tax purposes, including those related to deemed income and permanent establishment issues, and other amendments/clarifications that address these issues, would be a welcome move.

In the e-commerce sector, introduction of GST has resulted in additional compliance requirements and increased the complexity of doing business. Simplification of registration and compliance requirements, including availability of composition scheme for suppliers selling goods through e-commerce, could bring relief.

Enhanced working capital requirements due to GST on stock transfers, non-availability of composition scheme for e-commerce transactions and lack of clarity on treatment of cash-back schemes/gift coupons/vouchers offered by e-commerce operators have added to the uncertainty. Issuance of specific clarifications on treatment of various transactions unique to the sector, for GST purposes, will help.

With virtual and cryptocurrencies such as bitcoins gaining popularity in digital transactions, clarity is needed on their taxability under GST and whether they classify as goods, services or money/currency.

Increasing public investments in R&D of cyber security, incentivising industry participants for greater investments into deep tech along with budgetary support through Skill India for exponential technologies such as artificial intelligence, machine learning, robotics, augmented reality, IoT, etc, will help bridge the skills gap and nurture the ecosystem.

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