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.