The Hindu Business Line : Nurture small guys into tech biggies

The Indian information technology (IT) industry is going through unprecedented change. For the first time in the history of the industry, we are seeing a flat and, in some cases, negative revenue growth. This is happening in the midst of tectonic shifts in the world around us. A company such as General Motors — that was on top of the Fortune 100 list for about 40 of the last 50 years — today stands bankrupt. General Motors is not alone — many others are in a state of similar stress.

This has a rippling effect on the Indian IT industry because these giants have been our customers over the years. On top of the business pressures caused by uncertain customer situation, there is the unusual volatility in currency; it is playing havoc with the bottom-line of companies. Larger players that have the staying power to withstand the environment do not make for the industry’s future. It critically depends on the many hundred small and medium players who were born much after the few large companies at the top became successful. These small and medium-sized companies were born in difficult times from an overall environmental point of view. At the same time, they did not have the benefits that the larger siblings had. Given the continued global pre-eminence of the technology sector, Indian competitiveness and brand, we must allow more global companies to be born out of India.

Tax holiday for STPI

Given that context, it is very important that in the near-term, the government should extend the tax holiday for STPI units. It is not just extension of the scheme, but we need extending the cap of 10 years as well (this is a crucial point, unless the cap of 10 years is removed, older companies will not get the benefit of a simple extension of the scheme). We need the scheme to be extended till 2013-14 and the holiday be available for 15 years from the time the company was registered.

This need not be seen as revenue loss for the government. If the future of the Indian IT industry is to be secured, we must create the enabling conditions for the next 50 great companies to be nurtured. These companies need a long-acting stimulus in the form of a 10-year extension. Detractors could point to revenue loss; in reality, every job created by the IT industry leads to five-eight downstream multiplier; so the government can collect tax revenues from the GDP growth.

Service tax on rental of commercial property should be removed. The bulk of small IT companies work from rented premises. All the plum land has been taken by the larger players in every significant location. This is not true of the IT sector alone but of all new enterprises across industries. It makes more sense to encourage new entrepreneurs by making good quality infrastructure available and affordable so that they can attract global business, as against taxing what may be unaffordable levels of rent for many.

Do away with FBT

I believe that the Fringe Benefit Tax should be removed. It is a meaningless, administration-intensive tax; it does not generate significant revenue and creates enormous administrative hassles for both companies and for the tax department. It is not worth the effort.

In addition to all these, we need to focus on a few longer-term issues. We have to strengthen the education infrastructure. We are just about two decades old as an industry and already we find that talent pools are diluted and inadequate. The industry can create high-paying jobs, which is beneficial for the economy as a whole. But for that we must get high-quality talent. If the talent pool dries up, the Industry may need to look outside the country for talent to grow.

There is an additional matter of multi-lateral trade agreement that needs to get settled. We must accelerate the signing of totalisation agreements. We need to do it quickly with the US and European countries, in particular, so that we can avoid paying Social Security taxes in overseas locations for people transferred from India on a short-term basis. It is money being thrown away.

Finally, we must increase the spend on e-governance. It will create demand for IT equipment and services while improving citizen-interface with the government; it will result in increased efficiency and, hopefully, reduced corruption.

The government must look at the IT industry as a broad-based, nascent set of emerging enterprises that could help secure the country’s future as against the limited set of past companies at the top who were there at the right time and the right place.

(The author, co-founded MindTree where he now works as the Gardener.)

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