Stimulus to IT Industry in a changed market scenario

Rarely do finance Ministers get a platform of sustainable growth, copious forex reserves and liquidity position that Mr P Chidambaram has today. It should encourage him to continue the path of long sighted economic and fiscal adjustments and reforms that are desperately required in a country like ours.

However, issues like the impending economic slowdown in the US, rising rupee, oil prices add their own dimensions in his ability to choose options when framing the budget proposals. Not to forget the practical realities of the coalition politics and the end of the term consideration of a Government.

If we narrow down the discussions to the IT industry in general, the timing of this exercise cannot be lost. According to an Assocham report the IT/ ITES Industry will contribute 5 % to the national GDP. According to a recent survey the industry employs 1.6 million people directly.

Large urban clusters around Bangalore, Hyderabad, Delhi and many smaller towns/cities enjoy a significant amount of employment in support areas and wealth creation due to the concentration of the IT Companies.

More particularly looking at the nascent but very promising segment of the IT Industry, viz., RIMS, the space is set for explosive growth in the coming years. A February 2008 study sponsored by NASSCOM projects the RIMS practice alone to reach a size of $13-15 Billion by 2013, with potential to create jobs in excess of 300,000.

While the going was good for the last few years, there is a perceived threat to the growth of the industry due to the following factors and more particularly to the smaller and medium size companies:

· Significant appreciation of the rupee against major currencies like the US$ and GBP by as much as 14% over the last 12 months.

· Economic slowdown in the catchment areas like US

· Sub-prime issues and the consequential impact on the BFSI segment in US.

· Possibility of loosing the tax benefits under section 10A for units located under the STPI Scheme.

· Continuing war for talent and diminishing supplies

· Significant investments in training and process maturity required to compete against the larger players

· Rising costs in India including the cost of real estate and the manpower eroding into the cost advantage which was the genesis of the Industry itself.

Therefore the darling of the markets and a significant growth driver in the last decade now needs a stimulus for growth. There is a genuine fear that growth of many of the Tier 2 Companies will be threatened unless a stimulus for growth is given in some form or the other. Actually what is required is a combination of extension of the current schemes and new initiatives in a marginal way. If one were to have an option to choose, the initiatives could include the following:

· Extension of the Section 10A benefits for a period of another 5 years for Companies which are not so large. May be the entitlement could exclude the large players who are already established as leaders say with a turnover in excess of Rs. 500 crores. This would bring fairness to the proposal and also reduce the revenue impact.

· Implementation of the CENVAT refund scheme whereby the Govt. is supposed to be actually refunding the Service Tax on the inputs of the Services exporters. While the scheme allows for the refunds to be issued there is very little action at the ground level.

· Modification of the FBT rules to reduce the taxation rate at the time of vesting to be in line with the normal long term capital gains treatment of equity shares. Modification of the FBT regime will go a long way in enabling talent attraction by the smaller companies. When the margins are under threat this would give the Companies an opportunity to reward and retain the employees through grant of options as an alternate to salaries.

· Weighted deduction for the training and re-skilling expenses of IT Companies. India as a country would face a reduction in the availability of the Technical Manpower in the medium term. All efforts by the Industry to alleviate this should be encouraged as a national priority.

The above proposals do not warrant significant allocations in the budget but would reduce the impact of the changed market realities. Considering the number of people directly and indirectly supported and the feel good factor that has been generated over the last decade by this Industry it is too small a price to pay. This may also make the future Finance Ministers smile.