India must put IT back on growth track

Country's IT industry calls for government to withdraw minimum alternative tax on special economic zone income and provide more support for small businesses, in lead up to Union Budget which will be announced Mar. 16.
Written by Swati Prasad, Contributor

NEW DELHI--The Indian IT community has urged the government to provide more aid in terms of tax rebates and support for small and midsize businesses (SMBs), as the country awaits details of its 2012 Union Budget to be unveiled on Mar. 16.

The uncertain global environment has had an adverse impact on the Indian economy, with the IT-ITES (IT and IT-enabled services) industry expected to see lower growth in the 2012-2013 financial year.

"Many companies are not even projecting growth numbers for the coming year," Praveen Bhadada, director of market expansion at Zinnov, told ZDNet Asia. Customer demands have also fluctuated, forcing companies to change rapidly to stay ahead of the curve.

"To combat this state of flux, the government needs to make certain key policy decisions in this year's budget to ensure our IT industry continues to be on the growth track and have a positive outlook," Bhadada said.

Concurred Partha Iyengar, Gartner India's vice president and distinguished analyst and regional research director, who urged for focus to be on macro policies which will allow India to be more business-friendly. He added that priorities should be in the areas of skills development, research and development (R&D), and the development of Tier 2 and Tier 3 cities.

In its pre-budget recommendations, India's trade body and chamber of commerce for IT-BPO (business process outsourcing), Nasscom, urged the government to create a conducive policy environment that can help sustain and grow the local IT-BPO sector.

Reduce tax burden
Last year's budget was not kind to the IT sector, which bemoaned the implementation of a minimum alternate tax (MAT) on special economic zone (SEZ) units and the government's government not to extend tax benefits under the Software Technology Park of India (STPI) scheme.

The SEZ Act was enacted by the Indian government in 2005 to stimulate exports and generate large-scale employment. The most salient incentive had been the income tax exemption of export profits which had contributed to the scheme's success in attracting major investments.

Nasscom recommended the MAT on SEZ income be removed as it was counter to the government's long-term policy through the SEZ Act.

"Alternatively, MAT should be withdrawn at least in respect of SEZs, which have already been notified so that economic viability of these SEZs is protected," the industry body said. It added that the MAT rate should be brought to one-third of corporate tax rates, or 10 percent.

It also called for some certainty on transfer-pricing issues.

"The IT industry has recently been served some unreasonably high assessments based on transfer prices, creating issues of litigation for a number of companies," Nasscom said in its statement.

It recommended that a three-pronged approach be taken to expeditiously clear the backlog and provide certainty in the future for transfer-pricing issues.

Zinnov's Bhadada said: "Regarding [current] transfer pricing [guidelines], it is unclear as to how one determines whether the cost savings from a particular location exists or not, and to what extent this can be realized in India."

Support for the small
According to Nasscom, SMBs in India are facing challenging times due to the volatile economic environment.

It noted that while the SEZ Act provides for income tax exemption for a defined period, small companies cannot be set up in SEZs due to restrictive conditions in this Act. This created an uneven playing field wherein smaller companies that need support are unable to access it.

Nasscom recommended that India's Department of IT, as the nodal ministry for the sector, implemented a special scheme through which SMEs can get support either in the form of tax reimbursement or employment-linked incentives.

Similar provisions should also be applicable for companies that set up operations in Tier 2 or Tier 3 Indian cities, it added.

Swati Prasad is a freelance writer based in India.

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