IT-friendly and All That

The Indian software and services industry has an outstanding record of growth
and has been a flagbearer of India’s positive image overseas. Apart from
positioning India as a technology provider for the global market, it is also
helping domestic user companies gain efficiencies through adoption of
technology. Software exports continue to be one of the strongest contributors to
India’s forex reserves, accounting for about $25 billion of the country’s
overall figure of $70 billion.

The sector has also generated 92,000 new jobs and provided indirect
employment to over 250,000 people during the year and is the second-largest
contributor to India’s total exports. The industry has generated wealth of
over Rs 90,000 crore in the last six years and is expected to attract cumulative
FDI worth $1.2 billion by 2005. The IT software and services sector has
contributed Rs 960 crore in direct taxes alone in the last year, significant
when compared to any other sector, and has the potential to contribute upto Rs
3,500 crore as direct taxes by Year 2005.

An important element in this success has been the supportive and progressive
framework provided by the government. The software industry’s success is an
example of what government support and government-industry partnership can do.
The Union Budget for 2003-04 has recognized the potential of this sector and
reiterated the continued government support by retaining the full tax exemption
for exports under Sections 10 A/10 B, as committed by the government and
originally envisaged. Of importance is the fact that the government has taken a
long-term approach towards the industry and signaled this by continuing to
provide an ambience for growth.

At a time when most companies are experiencing low profitability margins, the
full tax exemption for exports was a much-needed respite, particularly for SMEs.
This is also important in the context of emerging competition from other
countries, especially when they are going all out to attract investment and
replicate India’s success. It will facilitate investment by Indian companies
in expanding their base across new service lines and geographies, steps
necessary for long-term growth.

The Budget has also amended the clause in Sections 10A/10B of the Income Tax
Act, which was holding back amalgamations and mergers. With the industry gaining
maturity, companies are looking toward consolidation to cater to the huge global
demand. This move may well trigger a new stream of inorganic growth, which will
bring synergies and contribute positively to overall industry growth. This will
also help remove an important hurdle which was restricting venture funding–as
venture capitalists will now be able to exit from a company without the company
losing its tax benefits.

The move toward computerization of the Customs and Income Tax departments is
a very positive step for e-governance. The acceptance of the Kelkar Committee
recommendations for creating a tax information network and expanding the scope
of taxpayer services by including extension of interactive voice response
systems and software for preparation of returns will lead to real benefits to
the citizens through IT. The step will bring in transparency and accountability,
stimulating the domestic market and e-governance rollout in the country.

There are still some procedural issues that need to be resolved at a micro
level–such as enabling software exporters to be exempt from physical bonding
of their premises/equipment by customs; ambiguities with regard to service tax
on IT-enabled services and IT education; there’s need to pursue the
Totalization Agreement with the US; the tax withholding issue with Japan and
other countries. But a solid beginning has been made...

KIRAN KARNIK

The author is the president of Nasscom.