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The Indian IT-ITES revenues stood at an all-time high of USD 118 billion and the industry is the largest private sector employer today. Expectations are high that a favorable business and investment environment gets created over and above sops.
When an industry contributes about 8% to national GDP and has 23-25% share in exports, the sustenance and profitability of the industry becomes everybody’s concern, and not just of the direct stakeholders. Consider this: 10 million people are expected to be employed in the IT & ITES sector by 2020, and another 40 million people to get indirect employment. Viewed through any lens, this industry is vital.
The government has been providing considerable support to the IT & ITES sector by way of direct and indirect tax benefits through the STPI and SEZ schemes (the direct tax benefits for STPI ended in 2012, but indirect tax benefits continue). While it is difficult to compute exactly how much these concessions have driven growth in the industry, it is fair to say these tax benefits increased profitability (making it more viable to do and expand business) and drove exports which directly helped forex.
During every budget season, companies and industry bodies alike express wish lists, asking for greater support. Given the current government’s claims of being growth focused, and not to mention, the much publicized ‘Make in India’ initiative, the expectations from the budget are high. Considering the existing benefits under STPI and SEZ scheme, what else should, or can, the government do in terms of direct financial benefits?
Moving beyond tax benefits
Many industry observers say the need and context for increasing direct financial benefits might be over, and now the government should now focus on creating a favorable environment for the sector to grow – physical infrastructure such as electricity, roads and connectivity to SEZs and other industry hot spots, removing red-tape in government facing processes, (re)assuring no retrospective taxation or other penalties, etc.
“Many a times, when governments lend continued subsidies or freebies to an industry, the industry as a whole becomes dependent on it. The IT/ITES industry has been an exception to this norm, having displayed maturity at various levels and it is competitive globally. The sector can stand on its own feet and any additional support should be in the form of facilitating. The government should ideally focus on the support structure – access to electricity, bandwidth, and such, going forward. The industry should push for reforms rather than seek increase in tax benefits.” says Shamika Ravi, Fellow at Brookings Institution and Assistant Professor at ISB.
Nurturing starups
The top 11 IT – ITES companies make 40% of the total revenue in the market. On the other hand, the small-sized players, totaling to about 15,000, share less than 10% of the total revenue between them (the mid-sized players consisting of 120-150 companies account for 35-40% of revenues). With the right impetus, some of these small sized companies can grow larger, thereby expanding the industry in all directions.
NASSCOM, in a press release summarizing its recommendations to the government for the union budget, highlighted the need for encouraging startups and entrepreneurs. To quote the industry body, “The emergence of a rapidly growing ecosystem for innovation; driven by young, tech savvy entrepreneurs, is a powerful new complement to the existing global reach of the industry. The SMEs and technology start-ups need an environment of constant nurturing including access to funds, incentives to support operations and a simplified compliance framework. On the other hand large enterprises require stable policies and predictable regulations to continue their global journey.”
NASSCOM’s recommendations too, seem aligned towards enabling startups and SMEs:
- Address difficulties in access to funding for low asset based firms
- Address investor difficulties related to regulations and taxations which currently
discourage investors - Remove ambiguity in software product taxation
- Extend provisions on deduction for employment and skill development (section 80JJAA)
Making ‘Make in India’ Happen
One of the deterrents for manufacturing in India for domestic consumption is inverted duty, by which importing a finished good may be cheaper than importing raw materials here and then manufacturing, owing to applicable taxes rates for the raw material and the imported finished item.
Alok Ohrie, President and Managing Director, Dell India speaks on how this has to change, taking the Indian PC manufacturing industry as an example. “While most key global leaders in the personal computers space have set up manufacturing operations in India, most of the domestic demand is still being catered to by imports. The customs and central excise tariff structure has historically been such that, importing finished goods for resale / direct import is often economically more viable than import of components for manufacture and supply. For import substitution to occur, it is imperative for the tariff structure be restructured to provide the much needed edge to a domestic manufacturer. The impact of the inverted duty structure is such that it effectively makes direct import by end customers or trading (i.e., import and sale) of IT hardware/ ITA goods far more advantageous in comparison to manufacturing of these products in India, thus making Indian manufactured goods non-competitive for the domestic market. Streamlining the tax rate for components across the board and extending the benefits that mobile manufacturing gets today, will normalize the situation”, he says.
Speaking on the manufacture of electronic goods in particular, Satinder Sohi, India Country Director, Freescale, feels the hardware sub-sector hasn’t seen the kind of growth that software and ITES have seen. He rallies for direct support in the form of tax rebates. “In 2015, the consumption of electronics is expected to rise from $6.03 billion in 2011 to $9.7 billion as per Indian Semiconductor Association (ISA). However, domestic manufacturing is predicted to show a downward trend by as much as 6.7%, with the gap being offset by electronics imports resulting in increased capital outflow. To achieve the exponential growth forecasted (for the next years), the need of the hour is tangible and specific initiatives to implement the terms outlined in the National Policy on Electronics. In addition, tax exemptions, sops for manufacturing, and R&D grants to arrest the outflow of capital will encourage electronic system design and manufacturing (ESDM) in India. A key move to improve manufacturing would be to restrict the rate of minimum alternate tax to 10% to provide a fillip to manufacturing.”
“Few of the other important areas where we see changes could be made are reduction in corporate tax rate, aggressive is investment of government stake in public sector units, higher personal income tax exemption limits and a massive increase in public expenditure to boost growth.”, he adds.
As far as budget optimism goes, it is now higher than earlier years. While the larger entrenched players may not see increase in direct benefits such as tax rebates (in addition to what already exists), the startup community and the large number of small-sized companies are waiting with bated breath for news on investor friendly changes. Various VC firms are expressing interest in India, and the time seems right for the government to foster an investor friendly environment. There are multiple benefits to the industry as well as the nation, from even a small percentage of funded companies leapfrogging into the big league. On the hardware manufacturing side however, much greater impetus seems to be needed, if ‘Make in India’ has to happen for and in IT as well.
[All figures / statistics have been taken from published NASSCOM reports.]– Kailas Shastry
