The Hindu Business Line : Make it a multi-pronged effort

The IT industry is set to touch $60 billion by 2010 from almost a scratch in the 1990s. The growth, over a two-decade span, is a fantastic achievement and a good example of what forward looking policy formulation can achieve.

The industry can touch $500 billion over the next 10 years, even if it grows at a moderate rate of 20-25 per cent.

While we celebrate the past success, it is time to gauge how the industry can continue to grow at current rates over the next one to two decades, given the vast untapped market.

This has to be seen in the context of the phase-out of the tax holiday enjoyed by companies in the software technology parks (STPI) in 2010. Merely focusing on extending this tax break by a few more years would be a short-sighted approach.

The fact is, the industry is dominated by large companies — the top ten companies account for over 80 per cent of the total export. Larger IT companies are aggressively exploiting the special economic zone (SEZ) framework to lower their tax incidence.

But restricting movement of business and resources between STPI and SEZ has introduced severe operational inefficiencies in these companies. Besides, revenues linked to intellectual property creation and products business is miniscule. Large companies also do very little outsourcing and sub-contracting.

Not just this. The IT industry puts tremendous pressure on urban infrastructure requirements and most of these companies do not participate in the development or partnering for infrastructure. The quality of human resources also continues to be a major concern. And growth is still centred around half a dozen big cities. Exports were crucial in the early 90s, but perhaps not any more.

Encourage SMEs

We need to make policy changes now to correct some of the above anomalies and the first place to start is by encouraging SMEs. Today, companies of all sizes are treated the same way for tax purposes.

Instead, let us create a differential tax structure and ensure smaller companies continue to enjoy zero tax and larger companies pay tax. The Government has been resisting the demand to extend STPI benefit primarily to not let go of the huge tax revenues from the IT industry. The suggestion here is for Government to collect its targeted revenues from the larger companies and keep it zero tax for SMEs.

Additionally, for all Government IT needs that are outsourced, insist on a certain percentage of work to be directly given to the SMEs by the Primary Vendor.

We can also provide tax and other incentives to the larger IT companies for all outsourcing done to the SME companies to encourage sub-contracting within the industry. Sub-contracting and ancillary unit development is a big part of most industries and we should enable the same in the IT industry.

Differential treatment

The next big area for correction in policy is related to differential treatment of companies in STPI/SEZs though they are in the same business. We need to examine the idea of an SEZ for IT industry and the way it is implemented now.

To begin with, most of the larger companies are using SEZs as a way purely to reduce taxes and it is debatable whether there is really new business coming which otherwise would not have come.

The IT industry is also not capital-intensive (as can be seen from some of their zero debt balance sheets) and hence the benefits in importing equipment or technology are very limited.

These companies need to grow in India and they would do so irrespective of SEZs. Majority of the IT SEZs are also continuing to get created in the existing IT corridors. Hence, SEZs for IT industry may not be serving their intended purpose.

Therefore, the Government should decide on a certain tax rate it expects based on the size of the company and after that let the companies decide on where they would grow their business. This uniform taxation also takes away the mad rush for creation of SEZs in the country (a good percentage of which are predominantly coming for IT).

Domestic thrust

On a related plane, we should also discuss the need to bring domestic services on a par with IT exports. The present framework encourages IT exports through various tax concessions.

We incentivised exports in the 90s when the Balance of Payments (BOP) situation was precarious. Now, with the healthy forex reserves and the strengthening of the Rupee (barring the events of the last one month where oil prices have changed some of this) preferential treatment for exports is no longer relevant.

The IT Services players get higher revenues and margins in the overseas market and are already incentivised to work on exports and we do not need to further encourage this through tax concessions.

The incentives for exports are working as disincentives to work in the domestic markets and we need to correct this by offering similar treatment to domestic services.

Infrastructure partner

The next big area where we need enabling policies now is in encouraging IT industry to partner for infrastructure development — be it the soft infrastructure around Human Resources or development of SMEs or IP creation, or hard infrastructure such as housing/road/societal infrastructure.

Development of Human Resources is extremely important for the Industry, the Government and the Society.

Government should offer incentives to companies that actively participate in HR development. Companies can also be incentivised for ‘Affirmative Action Programmes’ targeted at students from the disadvantaged sections of society to bring in social equity.

Similarly, experts have always pointed to the lop-sided growth in the IT industry where we have very little IP creation and software products but these are extremely important for success in the days to come. Government should encourage this by offering incentives for investments in these areas.

Presently the IT industry focuses exclusively on infrastructure within its office/campus and almost nothing outside.

Change in this paradigm will lead to faster progress on infrastructure development.

The industry should invest in infrastructure and use its superior managerial ability and bring to society the same world-class infrastructure created within its campus and the government should encourage such spending on infrastructure development.

One approach does not fit all

To sum up, we need to move away from painting the entire industry with same brush and bring in some variations based on needs.

There are always concerns around how incentives for any specific targeted purpose may be misused. But today, there is a greater premium for companies to follow clean business practices and in any society an effectively implemented policy is the best recipe for success.

We need to incentivise the industry to focus on the priority areas for the future and not shy away for the fear of failure in implementation.

The author is President of HYSEA (Hyderabad Software Exporters association). Views expressed are personal.

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