Passing Muster

When the Congress led-UPA assumed power in the year 2004, it was clear that
the government had little clue about what working on India as a Knowledge
economy meant. If one is to look back at the National Common Minimum Program of
the government., interestingly there is mention of almost everything but any
plans to enable strong growth of the IT industry. Though, e-governancewhich
ultimately has given a big push to the domestic market, even though it might not
have been done with that intentionand broadband do find reference, it seems
that taking steps to make India as a real IT destination never really was on the
agenda. That probably does reflect somewhere in the progress made in the various
facets, if taken on an individual basis.

Having said that, when we talk about the UPAs performance, a special mention
has to be made of the former minister of Communications & IT, Dayanidhi Maran,
who did a lot of hard selling of India to global players and boosted off
investor confidence in a big way.

It is unfortunate that at a time when the country had set double digit GDP
growth targets, even at the cost of appearing too ambitious, the government
somehow did not realize that IT would have acted only as a catalyst for meeting
that target. And it is actually surprising that the Congress minus the allies
still doesnt have a focus on IT in its current manifesto in 2009. It only needs
to be seen if the present government gets lucky to get another chance.

Raja vs Maran: Politically Correct?

At a time when the country needed a young, dynamic leader in the
Communications & IT Ministry who could make sure the investor interest in the
industry continues to grow, the appointment of A Raja in place of Dayanidhi
Maran, came as a dampener. It might have been a politically correct move for the
Congress-led UPA coalition, but for the IT and telecom industry, the decision,
as it now appears, was not the best one.

A Raja	Dayanidhi Maran

During Marans three-year-term, special mention has to be made of the year
2006. The year that marked the coming in of investments of not just the big
league but even the mid-tier companies. The foreign investment ranged from a few
billion dollars to a few million. Critics would say that would have come anyway,
but Marans intervention with promises to support manufacturing plants to
providing other facilities did help in substantial reassurance.

A long list of global CEOs came callingSamuel Palmisano, IBM; John Chambers,
Cisco; Joe Tucci, EMC; Edward Zander, Motorola; Henning Kagermann, SAPand they
brought with them purses of greenbucks for India.

Manufacturing was another interesting story. Quite a few players, especially
from telecom, announced investments in India. Nokia was a big one, followed by
Sony Ericsson and Motorola. Cisco too announced plans to set up an IP Phone
manufacturing facility in Tamil Nadu. Dell, Flextronics, LG, Foxcon were some
other big names. While a lot of this investment went into Marans native state
Tamil Nadu, for which he had an obvious soft spot and electoral compulsions too,
it cannot be denied that overall the country did benefit in a big way. Chennai
after all is in India, once you set aside all parochial Notions.

Infosys and TCS too committed investments around the same time. So overall
2006 was a great year for the IT industry. But did the country run at the same
pace in the following years? Especially with Raja at the helm. Unfortunately,
the answer is a big no.

Maran also undertook some other crucial initiatives: lowest-ever telecom
tariffs, initiating the fab policy, driving the hardware manufacturing agenda,
and strengthening e-Gov.

The resignation of Maran in May 2007, did throw open grounds for a lot of
speculation on whether the industry would be able to sustain the growth
momentum.

Though it might be difficult to draw a comparison between the performance of
Raja and Maran, one thing which is absolutely clear is the fact that the
momentum somewhere has slowed down in the last two years. Raja, industry
observers feel, has not been able to hard sell India to the global IT and
telecom companies, and instill investor confidence the way Maran was able to.

Of the unfinished tasks that Raja took over including the work on 3G spectrum
policy, semiconductor policy and e-governance still remain unfinished. Though
there has been some progress on the spectrum issue, there is little to boost of.
Many feel that Raja probably has not been able to come out of the protected
shell of M Karunanidhi, as a leader who could take India to the next level of
investments.

Though both Maran and Raja have been ministers of Communications & IT, the IT
part has been mostly ignored, especially in the case of Raja. Maybe we need two
separate ministries. Also, Shakeel Ahmed and Jyotiraditya Scindia have been
deputies to Maran and Raja respectively, but their roles in IT and telecom have
been nondescript to say the least. Maybe this ministry needs one dedicated
minister only, along with strong bureaucrats.

e-Gov: Not Extraordinary

This was clearly one area where there was a lot of traction. One mother of
all project, which covered almost all facets of e-governance, was the National
e-Governance Plan (NeGP). It did have a clear vision. It aimed to make all
government services accessible to the common man in his locality. The states too
got something to clearly work on.

Not many doubt that NeGP was the single most important project that at least
talked about binding together all the individual e-governance initiatives under
one roof to ensure availability of government services right up to the
grassroots.

Of the various schemes under the NeGP, the promise of one lakh common service
delivery outlets for six lakh villages at affordable costs was the most crucial.
The government did try hard to turn it into a reality, but the project missed
quite a few deadlines. The project, which was one of the largest IT
public-private partnerships in the country, intended to reach out to the rural
have-nots in a big way. The government clearly had a great opportunity to
completely transform the rural interface, but how much remained on paper, and
what really took off on ground is a debatable issue.

On paper, a number of states have initiated the process, but they are still
struggling to deliver services. The government had been consistently raising
budget allocation for e-governance every year, but that too does not seem to
have helped much.

Other than CSC, the State Wide Area Network (SWAN) and the State Data Center
(SDC), were the two other major schemes under NeGP that the states were trying
to focus on. SWAN, which was the first scheme to get approval, was meant to be
the backbone on which all applications and services would run. Till date only a
handful of states have officially launched SWAN, among which HP, Haryana, and
Jharkhand were the first. SDCs too have not taken off in a big way.

Clearly, the UPA government had talked about effecting a sea change but what
took place was anything but extraordinary.

STPI: To Be or Not to Be

The export-driven IT sector was hoping that the interim budget will extend
the Software Technology Park of India (STPI) scheme. However, the absence of any
policy statement over STPI in this years Union Budget left many in the IT
industry jittery over their own future.

The scheme is set to expire on March 31, 2010, and the UPA has left this in
the hands of the next government that comes to power. The only saving grace STPI
got from Chidambaram and Co were the two annual extensions it received in the
last two years; originally the scheme was supposed to get over in 2008. There
have been issues concerning revenue implications that the Finance Ministry has
raised, but the government has not been able to to sort them out.

It was expected that the government might consider replacing the existing
STPI scheme with the new SEZ policy, which is likely to have its own set of
incentives, but remain heavy on the pockets of smaller IT playerslike startup
entrepreneurs who have played a major role in shaping the images of cities like
Bangalore and Hyderabad as IT hot spots. The failure to extend the STPI scheme
would specifically spell trouble for small and medium IT entrepreneurs.

Government: Domestic Outsourcings Poster Boy

This was a period when public-private partnership projects and government
outsourcing took off in a big way. The credit definitely goes to government for
pushing the private partnership model in various facets of governance quite
well. The entire common service center scheme under NeGP was to be implemented
on the basis of a PPP model. Who would have imagined five years back that the
big fillip to domestic services would come from the government sector itself.

The MCA-21, a Ministry of Company Affairs project, was completely outsourced
to TCS and has been hailed as a successful project. Last year the Passport
Project of the Ministry of External Affairs was again outsourced to TCS.

Satyam: Handling of a Crisis

The year opened with a big bang as news of the Rs 7,000 crore Satyam fraud
rocked the country on January 7, 2009. On the same day, the companys chairman,
B Ramalinga Raju owned up to years of fraudulent and inflated accounting within
the company.

It could easily qualify as one of the toughest situations emanating from the
corporate world; not only because it was one of the biggest corporate scams the
country ever had to deal with, but also because it was threatening to become a
big credibility crisis for Indias emerging IT Industry. There is little doubt
that the crisis had to be handled with great swiftness, extra sensitivity and
caution.

To everyones surprise the government did move swiftly even in an area it had
hitherto remained deliberately away from by forming a three-member board. The
immediate task at hand for the board and government was to focus on enabling the
company to pull through, and secondly to make sure the image of the industry is
not tarnished.

The government got eminent people on the board like Deepak Parekh, chairman
HDFC; Kiran Karnik, former president of Nasscom; and C Achuthan, former member
of Sebi, so that no aspersions on their integrities could be cast later.

The intention was clear, that the government did not want Satyam to go under.
This was because of various reasons which had to do with a huge issue of job
loss (which could have become a major election issue at a sensitive time) but
more importantly, because the government was also thinking of the wrong signal
it would send to investors. There was talk of a bailout package too, which again
could have been pointed out as an issue directly connected to swindling off the
taxpayers money. But the government handled the situation very smartly, by
putting eminent people on the board.

Though clearly the government was sleeping on the wheel, as there were
regulation issues that had to be dealt with much before the scam came out in the
open, it successfully managed not to give the opposition a chance to point
fingers despite allegations of the Congress CMs proximity to Raju. The CBI is
now investigating the Satyam case. The fact that the BJP has not been able to
use the Satyam crisis as a major election issue, is a thumbs up for the
government.

Hardware Manufacturing: Countervailing Hiccups

The hardware sector, which for long has been treated as a poor cousin of the
high-profile software sector, didnt do any great shakes. The government has
been very conveniently ignoring the industrys long standing demand for bringing
down the countervailing duty (CVD). In order to push the growth of the hardware
manufacturing components, there has been a dire need to reduce the CVD in a big
way, which the government failed to do. The government did toy with the idea but
now it stands at a very high 14%.

IT Act: Never on the Radar

Even though it has been close to a decade when India embarked on its cyber
journey by introducing the IT Act 2000, it was only recently in 2005 when the
loopholes in the Act became glaringly apparent.

The not-so innocent peccadilloes of two DPS students in Delhi and by now
their infamous romp recorded for posterity via an MMS threatened to destroy the
very fabric of nascent e-commerce in the country but shaking up the IT Act
amendments in the process.

The immediate fallout of the steamy DPS MMS was the equally notorious Bazee
episode. With the arrest of Baazee.coms CEO, Avnish Bajaj, the country got its
first serious case of cyber crime where the law was invoked. Unfortunately, this
was one where the alleged Bajaj was little responsible for any misdemeanor.
Bazee was booked for running a website that contained objectionable third-party
content. ie, as someone tried selling the DPS MMS through the site. In this case
the IT Act has been used for booking a website, for allegedly obscene electronic
information posted on it and making it liable for the same. After a lot of hue
and cry, sense prevailed as Bajaj was released and plans made for necessary
amendments in the Act.

Ever since the IT Act came into existence it has already been amended twice,
the second time being as recently as last year. Interestingly, it wasnt even
notified the first time it was amended in 2006, passed by the Parliament, and
approved by the President. Experts feel that at both occasions, the amendments
havebeen a complete eyewash. In fact, the first amendment diluted the serious
act of hacking to just a petty criminal offense, with no strong punishments.

Most of the crimes that now come up are mainly to do with obscene MMS,
morphed pictures on the Net, etc. This might be demeaning or constitute
harassment, but not serious enough in the bigger picture. Unfortunately, serious
crimes which directly involve securing transactions have not come up in a big
way.

What is alarming is the fact that at this point, there is a complete lack of
awareness about the crimes and the Act, even at the government level.

Interestingly, recently there was a major goof-up that rocked the PMO office,
when the Microsoft Outlook that they were using was repeatedly hacked for four
months. All the emails were compromised with virus. The case was not given much
importance though. The media too did not take it up. It probably reflects on how
much the government and the media actually care about cyber threats. No wonder,
the Act too remains toothless.

MNC/BPO Double Taxation: Double Whammy

In January 2004, the Central Board of Direct Taxes (CBDT) had come up with a
circular on taxation of IT-enabled business process outsourcing (BPO) units in
India.

It was declared that a considerable portion of the profits derived by
foreign entities from outsourcing of their core revenue generating business
activities to India would be taxable under the Income-Tax Act if the Indian
entity were to constitute a Permanent Establishment (PE) of the non-resident or
foreign company in India. The issue became serious as the BPO industrys growth
was at stake.

The revised circular which came out in August of the same year (amidst a lot
of opposition) was better, but was also not completely able to sort out things.
It was now said that the profits of the Indian entity would be determined on the
basis of arms length principle. Unfortunately even though an effort was made
to solve the problem, there still was a lot of gray area that remained, as it
wasnt clarified what arms length really meant.

There was another subsequent tax-related development that significantly put a
lot of MNCs in troubled waters for long, when software major Microsofts Indian
arm along with a lot of other MNCs came under the tax scanner. A tax demand and
penalty of Rs 128 crore was slapped on the company for alleged evasion.

It was alleged that Microsoft Indias Gurgaon unit carried out certain
marketing activities for the India operations and not for the Singapore arm as
it had claimed. In Chidambarams evangelical mission to widen the tax net, would
Indian IT industry become a sacrificial lamb.

Semiconductor Policy: Much Ado about Nothing

The government, in March 2007, came out with the much-awaited semiconductor
policy providing capital subsidy to investors setting up chip manufacturing in
India. The government, as a result, expected to attract an investment of Rs
24,000 crore by 2010.

However, much harm had been done already due to the governments
dilly-dallying over the semiconductor policy. Intel had already selected Vietnam
as its manufacturing hub. The SemIndia consortium was also threatening to pull
out its $3 bn investment to set up the semiconductor fab for Hyderabad. Though
things are looking up a bit now with AMDs announcement to invest about $500 mn
in SemIndias proposed chip manufacturing facility near Hyderabad.

On the other hand, Apple too closed its development center in Bangalore
reportedly due to high costs of operations. The company had started operations
in May 2007 and closed shop a month or two later.

In fact the much-touted semiconductor policy till now has received a lukewarm
response so far. And the problem lies with the marketing of the policy or the
lack of it. The DIT has been able to attract only handful of proposals till
date. And now with global recession hitting the semiconductor industry in as big
way, the situation has got even tougher. Semiconductor seems to have
unfortunately passed India by.

Packaged Software: Throttling the Infant

It goes without saying that these five years were extremely crucial for the
IT industry. More so from the point of view of taxation. At a time when there
was a need to go out of its way to enable growth, the government stuck to its
heavy duty stand on the packaged software front. the UPA kept tweaking around
with the duty only making it worse by keeping and raising it in the range of
8-12%. The explanation: Software doesnt need infant industry protection. Its
booming, and can surely support a tiny tax. Some South Bloc babu, in his
wisdom, confused IT services with Indias fledgling packaged software industry.

The packaged software market in India is virtually comatose, thanks to the
terminal affliction called piracy, and with this one act the government ensured
that the oxygen mask gets pulled off.

Packaged software taxation has seriously impacted SMBs and even hampered the
governments cherished dream of bridging the digital divide, given the backdrop
of India being a price-sensitive nation. Both consumers and price-conscious SMBs
were forced to rethink their software purchase decisions.

Since even operating systems come under the ambit of packaged software, this
is expected to further push up prices of PCs with bundled softwareaffecting PC
penetration.

Fringe Benefit Tax: Another Liability

Interestingly, where 2004-05 was a year the software industry needed a
strong push to go into the next level, it was slapped with an extra tax
liability in the form of a fringe benefit tax. It was a tax which was to be
calculated in the case of an employer engaging in the business of manufacture or
production of computer software; in which case the value of FBT for conveyance,
tour and travel (including foreign travel), use of hotel, boarding and lodging
facilities was to be computed on a base of 5%.

The industry was clear that the concept itself was worrisome as work couldnt
be a fringe benefit. There was a huge impact on the software industry
specifically, as it was the one which undertook maximum number of overseas
onsite projects.

Urvashi Kaul

urvashik@cybermedia.co.in