R Chandrashekhar: IT sector at the crossroads

In the wake of demonetisation and fancy figures doing the rounds, one would ideally like to take a step back before recommending what the Budget should include for the information technology (IT) sector. Any fiscal or monetary policy henceforth will obviously be significantly impacted. While not wanting to sound judgemental about its efficacy at this juncture, it is encouraging to see a large section of the western media lauding this unprecedented move, which in turn has positively impacted India’s image. The presentation of the Union Budget – an annual affair – would be an opportune moment to not take the foot off the accelerator and press for the positives that have already come to pass.

Our recommendations to the government have been considered favourably in the past. Once more, let me reiterate some of the areas that require further consideration, to improve upon the industry’s competitiveness and make India an attractive destination in terms of investment. Wary as we are of economic and geopolitical headwinds, including a wave of protectionist measures which may prove to be obstructionist, our policy framework should take into account such exigencies often not under our control.

Granted, start-ups have received significant attention, but the avowed tax-related benefits announced in the Start-up India Action Plan remain out of bounds in many cases because of stringent certification requirement and mandatory government ratification. Appreciative as we are of the government’s approach in wanting to be selective, duplicating procedural requirements for those who have been incubated or funded by venture capitalists (VCs) works at cross-purposes. Other issues, if considered, should enable continuity, sustenance and investor confidence. These include minimum alternate tax (MAT) exemption for special economic zone (SEZ) units, allowing carry forward of business losses in case of change in the share-holding pattern by equity infusion not involving sale of equity or change of ownership, removal of angel taxation and the anomalies of long-term capital gains from sale of unlisted shares in the hands of non-residents and residents, and re-calibration of the holding period for investments in unlisted shares to qualify as long-term investments. 

E-commerce and on-line businesses have huge growth potential and need protection against discriminatory practices. For instance, website maintenance, advertisement and marketing expenses are being treated as capital expenditure. These expenses under normal circumstances should be allowed as revenue expenditure. The current practice of dual levy (value added tax and service tax on delivery charges and service tax on aggregators paid once by customers) hold the digital economy back. 

A slew of long-pending clarifications (which have led to a lot of heartburn in the past) continue to overhang and adversely impact the ease of doing business index: Service tax refunds, SEZ-related difficulties, dual and levies, to name a few. Under the goods and services tax (GST) regime, they are likely to be relegated as legacy issues, unless they are resolved now to help the industry deploy resources appropriately.

We have entered the age of innovation which will be the growth driver of the future. The government, too, has spelt out its grand vision through its marquee projects such as Digital India. Here, a distinction needs to be made between research and development (R&D) as seen by manufacturing, and research and development initiatives of the IT sector. Currently the R&D income tax benefit is not available to the IT sector and restricted only to manufacturing organisations. The government is cognisant of the fact that this sector is grappling with global push back, as it adopts and adapts to new-age technologies. Hence, the scheme in support will have to be tailored accordingly. Perhaps there’s learning to be borrowed from global models, especially from Canada, Israel, Germany and Ireland, which consider R&D in the software/hardware/IT eligible for R&D benefits.

Place of Effective Management draft rules (POEM, threatening to render a jarring note!) are not yet notified even after nine months of the date of implementation (April 1). A further deferment is suggested to ensure that rules are notified before implementation as retrospective compliance would not be feasible. POEM is employed by developed economies who command a significant share of world trade, and in addition, outward direct investments (ODI) exceed the foreign direct investment (FDI) into the country. Clearly India is oblivious to these situations and hence, we have suggested a certain rationalisation in accordance, to enable a friction-less business environment. POEM will have a substantive impact on the IT sector, as we lead the Indian MNC journey and have global delivery centres and subsidiaries in over 78 countries.

There is an unprecedented opportunity for global partnerships. MNC presence in India meets the twin objectives of investment and enhanced branding. It is therefore essential that such entities are not subject to undue hardships. Transfer pricing issues such as the revision of safe harbour margins, removal of ambiguities on domestic transfer pricing provisions and eligibility for exemption under Section 10A/10AA (should not be subject to transfer pricing provisions) will have to be addressed with a greater sense of urgency. 

Software product taxation continues to be plagued by dual levies of VAT and service tax and high cumulative cash outflow due to TDS at 10 per cent. While the dual levy is expected to be resolved with GST coming, TDS implication leads to liquidity crunch for these companies. This is because software product is the only “goods” that are subject to a 10-per cent TDS arising out to royalty implication on all software transactions. Inexplicably, this is also not aligned to international norms where royalty implications arise only when there is transfer of copyright.

The IT BPM industry in India ($150 billion, FY 16) is exports driven — at $108 billion. We have our footprint in more than 670 offshore destinations spread across 78 countries and employing 4 million people in process. We contribute significantly to earn foreign exchange and sustain a favourable BoP position. In addition the contribution of tech start-ups (4,700 of them and the ecosystem is ranked 3 globally) is no less impressive. The proverbial crossroads is where we stand now, as we seek governmental support and prepare to take giant strides towards achieving $225 billion industry revenue by 2020.

The writer is president, Nasscom