Indian IT seeks better biz environment in upcoming budget

In the leadup to the February 28 budget announcement, India's IT community calls for steps to boost the country's broadband penetration and drive the startup ecosystem.
Written by Swati Prasad, Contributor

NEW DELHI--The Indian IT industry has a long wishlist in the leadup to the Union Budget, ranging from clarity on transfer pricing matters to steps that would increase broadband penetration and improve the startup ecosystem.

To be announced by finance minister P. Chidambaram on February 28, this year's budget is a critical one for India with economic growth projected to hit a decade-low of 5 percent during 2012-13. It is also an important one for the ruling party as the country will go to the polls next year.

Most Indian IT companies are wishing for more than just tweaking of tax rates. Partha Iyengar, country manager of research at Gartner India, said in a statement: "The IT industry today has reached a tipping point in terms of scale and maturity, where issues it is grappling with as the next impediment to growth do not have to do with granular industry level issues like taxation, SOPs, and so on."

Issues that will enable growth for the industry are more fundamental in nature such as infrastructure improvements, education, skills development, streamlined regulatory procedures, and improving the investment climate, Iyengar noted. "I would look at increased focus on budget allocations or clarity of future direction of the government on these macro issues as indicators for the future success of the IT industry," he added.

Indian companies will invest at least US$10 billion to US$15 billion in modern IT over the next five years. "With the growing importance and relevance of modern IT, including cloud computing, big data analytics, and mobility, we expect this year's budget to specifically focus on creating a robust framework and incentives to encourage modern IT adoption," said Zinnov CEO Pari Natarajan. "While initiatives on cloud computing are being taken at multiple levels, a collaborative framework including government, academia, associations and industry is much required. Similar initiatives are being taken at the United States, Australia, Korea, and other key markets."

The body for hardware manufacturers, Manufacturers' Association for Information Technology (MAIT), has asked the government to increase manufacturing in India. "With manufacturing value-add in India abysmally low, a whopping US$320 billion worth of electronics will be imported by 2020, which may exceed the annual oil-import bill," said Anwar Shirpurwala, MAIT's executive director. The association has recommended an abolishment of the inverted duty structure on IT components which will help revive demand and promote manufacturing in India.

There are also calls for the government to boost broadband adoption. "We expect the budget to take steps to increase broadband penetration. One of the ways is by making it affordable to the end-user, especially on the mobile," Arunn K. Asthaana, managing director and CEO of digital media company VVIDIA Communications, told ZDNet in an e-mail. 

Internet, like telecom services, attracts a 12 percent service tax. "Abolishing service tax on mobile Internet and broadband services would make it affordable and boost penetration, as well as help empower users in non-metro and rural India," Asthaana said.

Zinnov is also expecting an increase in the e-government outlay and for programs such as the Restructured Accelerated Power Development and Reforms Program (R-APDRP) and Unique Identification Authority of India (UIDAI). "An increased outlay combined with effective and efficient implementation is likely to improve the quality of life of people and have a positive impact on Indian companies and MNCs (multinational corporations) in the IT sector," Natarajan said.

More clarity on transfer pricing

Indian tax authorities also have been aggressively pursuing tax claims against MNCs operating in the country, with a focus on their IT and backoffice functions, and targeting several for tax audits on transfer-pricing including Vodafone, Capgemini, and LG Electronics.

This has raised concern about the impact on foreign investment. According to an Ernst & Young survey conducted last August, at least 1,500 transfer-pricing disputes proceeded to litigation in India as of February 2011, compared with fewer than six in the United States, and none in Taiwan or Singapore.

In 2009, the Indian government had looked into transfer-pricing issues several measures including "safe harbor" provisions, a dispute resolution process, and the use of advance pricing agreements (APA). However, it did not implement any of these measures.

Industry body Nasscom has recommended a three-pronged approach to clear the backlog and provide certainty in the future for transfer-pricing issues. First, safe harbor provisions should be used to resolve all outstanding cases including past and current claims. Second, APA should set fair and transparent pricing of transactions and provide certainty to companies in the future. Third, it called foro a review of the structure and procedures of the Dispute Resolution Panel to ensure the mechanism is effective.

"We hope the government carries forward its recent policy statements aimed at simplifying and clarifying transfer-pricing norms," Zinnov's Natarajan said.

At present, over 850 high-tech MNCs operate R&D (research and development) centers in India, creating direct employment for over 250,000 highly qualified persons, thereby retaining knowledge workers in India. Furthermore, the indirect employment multiplier is 1:4. "Clarity in transfer pricing will encourage existing multinational R&D centers to expand," he added.

The IT industry is also calling for the withdrawal of the minimum alternate tax (MAT) on Special Economic Zone (SEZ) units, introduced in the 2011-12 budget. The SEZ Act of 2005 was enacted to stimulate exports and generate large-scale employment. According to Nasscom, the most salient incentive had been income-tax exemption of export profits which had contributed to the scheme's success in attracting major investments.

Reiterating its call last year, Nasscom is urging for the 2013 budget to withdraw the MAT on SEZ which it said was counter to the government's long-term policy. "We hope it's discontinued or reduced drastically. This would lend strategic benefits and ensure continued thrust on investments from companies with long-term focus on India," Jagdish Mahapatra, McAfee's managing director for India and SAARC, said in a statement.

Create startup ecosystem

With the volatile environment, SMBs (small and midsize businesses) in India are facing challenging times. While the SEZ Act provides for income-tax exemption for a defined period, small companies cannot be set up in SEZ due to restrictive conditions in this act.

"This has created a non-level playing field where smaller companies that need support are unable to access it," said Nasscom, which has recommended a special scheme to provide SMEs support either in the form of tax reimbursement or employment-linked incentives.

According to Zinnov, India currently has over 45 million SMBs and this sector contributes 40 percent of the manufacturing output and 17 percent of the total economy. "It will be important for the government to collaborate with the industry ecosystem toward encouraging usage of technology to help the SMB sector enhance global competitiveness," Natarajan said.

Aasthana added that the budget should provide incentives to encourage MNCs and large enterprises to collaborate with startups and young companies.

According to Natarajan, India's startup ecosystem holds strategic importance in accelerating innovation and the budget should support its growth. Industry-ready incubators, expansion of incentives for private incubators, funding supportand incentives for entrepreneurs to set up a venture will provide the necessary thrust to the ecosystem, he added.

Swati Prasad is a freelance IT writer based in India.

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