The IT industry is set to touch $60 billion by 2010, from almost a scratch in the 1990s. This is a great example of what forward-looking policy formulation can achieve. The industry could touch $500 billion over the next 10 years, even if it grows at a moderate 20 percent-25 percent.
However, even as we celebrate our past successes, it is time to think on how the industry can continue this rate of growth given that there is vast untapped market to make this growth possible. With the phasing out of tax holiday for software technology parks (STP) in 2010, there is an opportunity to relook at the entire policy framework and it would be short-sighted to merely focus on extending this tax break for STPs.
The fact is that today the industry is dominated by large players – the top 10 companies account for over 80 percent of the total exports. Larger IT companies are aggressively exploiting the special economic zone (SEZ) framework to lower their tax incidence. Further, revenues linked to intellectual property (IP) creation and the products business are miniscule. Large companies also do very little outsourcing and sub-contracting.
Not just this. The quality of human resources remains a major concern. Besides, growth is restricted to half a dozen big cities putting pressure on urban infrastructure in these cities.
We need to make immediate policy changes to correct some of these anomalies and the first place to start is by encouraging small and medium enterprises (SMEs). To begin, why not create a differential tax structure to ensure that smaller companies continue to enjoy zero tax and larger companies pay taxes? The government can collect its targeted revenues from the larger companies and lift the burden off SMEs. Additionally, for all outsourced government IT needs, a certain percentage of work can be mandated to be awarded directly to SMEs by the primary vendor. Tax and other incentives can be provided to larger IT companies for the work they outsource to SMEs.
The next big area for course correction relates to differential treatment of companies in STPI/SEZs, though they are in the same business. Most of the larger companies use SEZs purely to reduce tax and it is debatable if this is generating business that would not have happened otherwise. For the industry, the benefits in importing equipment or technology are also limited. These IT companies need to grow in India and they would do so irrespective of SEZs. In effect, SEZs for the IT industry may not be serving their intended purpose. To reiterate a point made earlier, the government should decide on a tax rate based on company size and thereafter let the companies decide where they want to grow their business.
On a related plane, there is also a need to bring domestic services on par with IT exports. Exports were incentivised in the 1990s when the balance of payments (BOP) situation was precarious. Now, with our healthy forex reserves this preferential treatment of exports is no longer relevant. IT Services players get higher revenues and margins in the overseas market and this by itself encourages them to focus on exports. We need to bringing domestic services to an equal footing by giving them similar benefits to IT exports.
The next big area where enabling policies are required is to encourage the IT industry to partner with the government for infrastructure development – be it soft infrastructure like human resources or creating IP or Software Products, or hard infrastructure such as housing, roads and much needed societal infrastructure.
Human resource development is vital for industry, government and society. The government should offer incentives to companies that actively participate in developing human resources. Companies that create social equity by initiating affirmative action programs targeted at the disadvantaged sections of the society should also be eligible for incentives.
Experts have always criticised the lopsided growth in the IT industry, where there is relatively little to show in terms of IP creation and software products. Such efforts are essential for success in times to come and offer avenues for significant competitive advantage. The government should encourage growth in this direction by offering incentives for investment in these areas.
At present, IT companies pay little or no attention to developing infrastructure outside of their premises. The industry should invest in societal infrastructure and bring to society the same world-class infrastructure it has created within its campuses and offices. The government, for its part, should encourage wise spending on infrastructure development.
In short, we have to move away from painting the entire IT industry with the same brush and introduce variations based on needs. True, there are always concerns around how incentives for any targeted purpose may be misused, but in any society; an effectively implemented policy is the best recipe for success. The government should not shy from making these changes for the fear of failure in implementing them.
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