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Indian offshoring - the new worry

Opinion: Look to the tax man
Written by Mark Kobayashi-Hillary, Contributor

Opinion: Look to the tax man

What is the hot topic for the India IT outsourcing community these days? It's harder to say than it used to be but Mark Kobayashi-Hillary gets a reading on what matters most on the sub-continent during a recent trip to Mumbai.

This year is packed with significance for the UK's relationship with India. To start with, it's the 60th anniversary of independence from the British. Just think - all those years of foreign managers such as Robert Clive benefiting from lower-cost production in India. How things have changed.

It's also interesting to note that India's well-known Tata group, owner of IT services company TCS, has had offices on Grosvenor Place near Buckingham Palace for a century now. The mayor of London is transforming central London into a miniature India for the whole of July, August and September this year - and let's not even get onto the topic of Shilpa Shetty and Big Brother (I'm just disappointed we didn't get wall-to-wall posters of Bollywood star Preity Zinta on the show).

With all these events fresh in my mind I took off for Mumbai last week to attend the annual Nasscom conference. Nasscom - which stands for National Association of Software and Service Companies - represents about 95 per cent of the Indian IT and high-tech services industry in India. Effectively it's the voice of Indian technology and outsourcing.

When I travelled to the Nasscom event last year there was an enormous row over Valentine's Day. It has only recently become a popular concept in India and angry mobs had burned shops that dared to sell gifts aimed at lovers celebrating the holiday - evidence of the local outrage at Western customs usurping local tradition. This is just a minor example of the struggles arising as India quickly changes and adapts to global customs and behaviour.

This year I saw billboard posters everywhere for Valentine's Day. Restaurants were advertising candle-lit deals for couples, phone companies were encouraging text messages of devotion and shops everywhere had succumbed to selling kitsch tat at twice the usual price.

A further example of how India is changing is the availability and price of good hotels close to where people want to do business. The main hotel chains no longer see any need to charge prices that reflect the fact they are located in a low-cost environment - they just charge international rates. I could not even get into the conference hotel for the second year running because it was booked months in advance - at something like $300 per room. Only a few years back I was enjoying the 5-star experience in India for $100 per night. Those days are truly over for any business traveller to India now.

When I arrive at Nasscom conferences, I can usually smell a grand-unifying-theme, an issue that transcends industry competition but this year was more like a smorgasbord of issues, rather than a Billy Bragg diatribe on a single topic.

Alistair Cox, CEO of UK-based IT services company Xansa, told me the big issue is managing the rate of industry growth. V Sreenivasan, vice president at IT services company ITC Infotech, tried convincing me that hiring and attrition is the big issue of the year. Ashank Desai, chairman of Indian IT outsourcing company Mastek, told me it is the education sector learning from the liberalisation of the technology sector. And Francisco D'Souza, president and CEO of US-based IT services company Cognizant, told me the big story is innovation.

All of them are right and in a way this is a healthy development for India. No longer is the Nasscom conference focused on reacting to negative news stories in the UK and US, or fire-fighting the reaction to another data protection sting by a UK journalist. The industry seems to have matured to an extent that the Xansa view can be totally different to the Cognizant view and yet both are valid. This is a healthy place to be.

However, based on a modest number of 'Kingfisher conversations' possibly the biggest single issue in the Indian technology industry right now is tax breaks. When the industry exploded in popularity, the government proclaimed the country a tax-free zone until 2009. Now that date is looming on the horizon and every provider of international services is wondering if they are going to have to start paying hefty corporation taxes in a couple of years.

One ramification of this is that many offshoring companies could no longer operate profitably if they had to tear up their pricing structure and work out a new way of funding the tax. They have all been lobbying the government furiously and pointing to what others regions are up to. For example, Dubai is offering a 30-year tax holiday for companies starting up there which offer technology-enabled services.

Thus it was especially important when Indian Prime Minister Dr Manmohan Singh spoke at the conference. Singh is fondly remembered as the finance minister who, in 1991, completely liberalised the Indian economy and switched to a focus on markets, rather than socialism. In a country of more than a billion people, socialism is still an important concept but Singh is the man who freed companies to go and seek their own destiny.

The Prime Minister seems like such a nice man. He looks small and frail and his voice is quiet, even with microphones. He is like a favourite old uncle you respect - a complete contrast to the President who is more like an Indian version of Steve Jobs. Yet despite this soft outer image, Singh is a brilliant economist with a razor-sharp intellect. He promised he had heard the concerns of the industry and planned to act on them. I can't guarantee it but in my view that is 'Indian politician speak' for an agreement to extend the tax breaks.

When Mastek's Desai gave me a lift across Mumbai in his car to the closing party for Nasscom, he told me he feels India should step up to the plate and behave more like the leader it is. I tend to agree.

This is the first time I have seen such a strong sense of maturity and self-awareness at the Nasscom conference. Perhaps the unruly Indian teenager is about to mature into an adult that can lead the world IT industry, rather than feel ashamed of the earlier stigma of a purely low-cost location.

Mark Kobayashi-Hillary is the author of 'Outsourcing to India: The Offshore Advantage' (Springer) and co-author of a new BCS book 'Global Services: Moving to a Level Playing Field'. He is a director of the National Outsourcing Association.

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