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How will software sector be affected

July 08, 2004 17:53 IST

With the value proposition of offshore development being well established, corporates in the West are increasingly outsourcing to India, and this promises a bright future for the Indian software sector as a whole. The fact that India's share in the global software and services industry is a mere 3% provides Indian IT sector with a huge potential to grow going forward.

 Budget Measures
  • Full excise exemption on computers (from 8% earlier).
  • Bill for regulating Special Economic Zones (SEZs) to be introduced.
  • Prepare an Investment Commission to facilitate investments (both domestic and foreign) in the area of telecom and high technology.
  • Telecom FDI limit raised to 74%, from 49%.
  • Service tax has been raised from 8% to 10%. Further, a surcharge of 2% on account of education cess will be imposed on this tax.

     Budget Impact
  • With as low as 5%, India is on the lower rung as far as computer (PC) penetration is concerned. As such, excise exemption on computers is a step in the right directions and will aid PC penetration in the country.

  • Despite its advantages on cost arbitrage and high talent fronts, the Indian software sector suffers from poor telecom infrastructure and investments in related areas. The setting up of an Investment Commission to facilitate investments in high technology and raising FDI limit in the telecom sector are positives to counter this problem.


     Sector Outlook
  • As initiatives to become globally competitive gain pace and with the value proposition of offshore development being well established, corporates in the West are increasingly outsourcing the IT requirements to India. This promises a bright future for the Indian software sector as a whole. However, despite having key advantages on the costs and talent fronts, the sector still suffers from the lack of proper infrastructure. If necessary attention is given to the development of key infrastructure for facilitating development of IT in the country, the fact that we are still a marginal force in the global technology space provides us with a huge potential to grow going forward.


     Industry Wish List

    Nasscom Wish list

  • Take proactive steps to resolve various issues related to direct and indirect taxes.

  • Exempt computers from customs and excise duties

  • 100% annual deprecation on PCs.

  • Advancing target dates by one year for reducing import duties for IT products to 10% in 2004 and zero by 2005.

  • Take a fresh look at issues like taxation of non-residents, rising uncertainty and lack of transparency in the case of various incentives and exemptions being provided to the IT software sector.

  • Look after supportive infrastructure such as improved telecommunication facilities, efficient airports and ports, reliable power supply, efficient urban mass transport and good roads to retain India's global edge in the IT and ITES sector.

  • Special Economic Zone (SEZ) scheme for educational institutions that would provide incentives and facilities to educational entities in the line of incentives offered to units operating under the Software Technology Park (STP) scheme.

    Mr. Shashank Patkar, CFO, Geometric Software Solutions

  • No tinkering with 10A.

  • Drawback or rebate on service tax for software exporters.

  • Further simplification on import/export processes. (For instance, the government has simplified the filing of Softex, a form for software and services exports).

     

    Mr. Ravi Ramu, CFO, MphasiS-BFL

  • Tax/capital investment incentives for the corporate sector for setting up IT/BPO units in districts and towns and other less urban areas and investing in telecommunications and related infrastructure in semi urban and rural areas.

  • Clarification regarding the uncertainty over the recent interpretation of the Section 10A /10B benefits.

  • E-commerce taxation is an issue that has been left open for a number of years. Specific guidelines on Permanent Establishment and related tax consequences need to be clearly formulated.

  • The cumbersome requirement for IT companies to prepare Softex Forms to be submitted to STPIs surely needs to be done away with since it no longer seems to serve a purpose at all.

  • In keeping with the requirement to bridge the digital divide and to spread the use of IT in a meaningful manner across the country, STPI units should be set up, to begin with, in key district headquarters.


     Budget over the years
    Budget 2001-02Budget 2002-03Budget 2003-04
    Onsite services for companies located in STPS (Software technology parks) and EPZ (export process zones) to be exempt from taxation. This is also to be extended to software companies outside the STPs and EPZ.

    Overseas investment limit for software companies increased to US$ 100 m or 10 times their export earnings whichever is higher.

    FII limit increased to 49%.

    Companies allowed use 100% for the ADR/GDR proceeds for investments abroad.

    The 100% deduction of export profits allowed to certain units under sections 10A and 10B of the Income-tax Act has been reduced to 90% for FY03.

    Limit for overseas investments through automatic approval route increased from US$ 50 m to US$ 100 m.

    The limit for joint venture investments up from 25% of net worth to 50%.

    Benefits under Section 10A/10B for IT companies to continue.

    IT companies will continue to enjoy the benefits of 10A/10B benefits even after a change of management.

    Pre-loaded software in computers to be exempt from excise duty.

    Limit on overseas investments for companies increased from 50% of networth to 100%.

    Key Positives
  • Huge outsourcing potential - With the value proposition of offshore development being well established, corporates in the West are increasingly outsourcing to Indian software companies. Also, the fact that India's share in the global software and services industry is a mere 3% provides Indian IT companies with a huge potential to grow going forward.

  • Moving up the value chain - Indian software companies are consistently broadening their portfolio of offerings and moving fast up the software value chain. Not only will this help Indian companies garner higher billing rates but it will also give them an opportunity to work far more closely with the top management of client companies.

  • Scale benefits of past investments - In anticipation of a higher demand for their services going forward, Indian software companies have rapidly ramped up their employee base and opened development centres and sales offices abroad. These initiatives are likely to pay-off over the long-term as these companies are likely to derive benefits of large scale as they grow larger in size.

  • Global Delivery Model - The Indian offshoring model, or the Global Delivery Model, has been one of the biggest positives for the growth of the Indian software sector. Large companies like Infosys and Wipro have indeed refurbished this model to accommodate to the changing times. What more, the fact that MNC technology majors like IBM, EDS and Accenture have tried to replicate this model, gives it greater authenticity.

  • Other positives - Among other positive factors for the Indian software industry, the major ones are - large availability of talented manpower, cost advantage and geographical advantages (time-zone advantages).

      
    Key Negatives
  • High reliance on the US markets - The US market's share in India's software and services exports is around 68%. Such high degree of dependence on a single geographical location spells high risk for the Indian software sector. Over that, backlash in the US against outsourcing of jobs to low-cost countries like India has raised some medium-term concerns for Indian software companies.

  • Decreasing cost advantage - Increasing competition from global technology majors has not only threatened Indian IT industry's cost leadership, Indian software companies have also been made to face intense competition for talent. All these pressures mean lower stagnant billing rates and higher employee costs going forward. This is likely to affect margins and, consequently, the profitability of Indian companies.

  • High rates of attrition - High attrition, especially in the middle and senior positions, continues to damage the performance of Indian software companies to a certain extent. Apart from competition for talent from MNC technology majors, internal factors like job dissatisfaction and higher aspirations (in case of BPO companies) have led to such high attrition in the Indian software sector.

  • Hardware and domestic markets - While India's software and services exports have witnessed robust growth over the past few years, the growth in the domestic and hardware market has been relatively staid. This is a key cause of concern for the growth of the Indian IT industry.


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    Number of User Comments: 3




    Sub: IT

    This is true; as far as FM and PM are considered, they want to satisfy only the lower income levels.


    Posted by Rajesh





    Sub: IT

    This is true; as far as FM and PM are considered, they want to satisfy only the lower income levels.


    Posted by Rajesh





    Sub: IT

    The IT exemption to Salary class is actually Bogus. No use to the middle income class


    Posted by Dinesh Mathew




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