New Delhi: There are a number of steps that the government can take in order to help IT/BPO companies sustain the momentum gained so far, and ensure India remains the preferred global destination for providing these services.
Suhale Kapoor, executive vice president and co-founder, AbsolutData Research and Analytics
These companies - especially small and medium enterprises, are currently facing the challenges of achieving aggressive growth, along with issues of increasing infrastructure cost, finance rates, exchange losses, lack of skilled resources, attrition etc.
*STPI Scheme: One of the most pertinent needs today of IT companies from Budget 2008 is the extension of the tax holiday under the Software Technology Parks of India Scheme, which expires on 31March, 2009.
Most small and medium enterprises in the IT sector operate in specific niche markets and rely extensively on innovation to get a competitive edge. Extension of STPI will provide an equal ground to small and big companies, and between India and other countries. It will also help sustain growth of BPO sector.
The STPI Scheme has proved to be an advantage and has nurtured the IT-BPO industry over the past years. This is evident by the contribution this industry has made to the growth of the Indian economy. The IT-BPO exports were to the order of $32 billion, there were 1.6 million direct hires and may be up to four times indirect beneficiaries. The tax holiday breaks have played a pivotal role in nurturing the industry, and resulted in greater employment opportunities and rise in income levels of the people.
FM should extend the tax holidays for STPI units beyond 2009, enabling them to come at par with the tax benefits available to SEZ units. This will ensure sustenance of the current growth rate which has become increasingly difficult with global retardation of economic growth and a depreciating dollar rate.
In the current scenario, if the government does not take active steps to reduce spiraling costs of IT companies, it may prove fatal for the Indian IT industry, as other competing countries are coming up with attractive policies to attract MNCs and IT-BPO companies, like tax holidays, free space, reimbursement of salaries and of training costs. Most of these countries provide lower operational costs and their infrastructure is far superior compared to India.
*SEZ Zones: Renting out SEZ space is difficult as enough capacity is not always available in the right location. Rentals have shot through the roof due to the real estate boom and lack of availability. It is very difficult for companies to move from their present base to other locations where there are SEZs. Besides, the sharp appreciation in rupee and slowdown of the US economy has affected margins of many smaller ITES companies.
If budget 2008 can make provisions to align service tax exemption available to SEZ units or developer to units in STPI or EOU, it would be a big step to augment the growth of this sector. Alternatively SEZ can be extended to apply to an office premises rather than a new construction, even for a greenfield venture.
* Inclusion of advance payment agreements mechanism: Countries like US, Canada, Mexico, China, Taiwan, Korea, Japan, Australia and almost every European country already have a mechanism embedded in their tax legislations for advance pricing agreements on transfer pricing issues. Including an APA mechanism in the budget would provide much needed tax certainty and avoid protracted litigation against transfer pricing adjustments at the field level.
* Reduce service tax paid on services utilized for export of computer software and BPO services: Service tax on input services consumed in software and BPO business amounts to around 3% of business cost, which is a significant number when Indian companies have to compete in international market.
*Preferential rates of interest for small and medium enterprises in IT industry: With global economic slowdown and strengthening of rupee, margins of most IT-BPO companies have been significantly affected. Also, with increasing competition from other countries offering major tax benefits to MNCs and IT-BPO companies, the Indian government needs to introduce incentives to make sure that the global environment is not detrimental to the Indian IT industry. Reducing preferential rate of interest on loans will compensate losses arising out of the dollar dip.
*Set up training institutes: Large companies like Infosys have set up their own training institutions to train fresh graduates in technical skills and bring them up to the professionally needed skill levels. While abundant in number, fresh graduates out of college are not equipped to take on complex technical assignments or apply theory to business situations. Small and medium enterprises find it difficult to bear the costs of training that is required to get these candidates up to speed with the needed skill levels. Setting up new institutes and/ or providing financial incentives to private/quasi institutions for short-term training modules to freshers will give them requisite skills to take on complicated technical assignments on the job.
Suhale Kapoor is executive vice president and co-founder, AbsolutData Research and Analytics