• SEPTEMBER 25, 2012

IT Sector: Impact of FY13 Budget and other Govt. Policies

Sustainability and growth of any sector or industry are not just dependent on the demand for and the margins earned on the industry's products/services, competition from substitutes, among other things, but also on the government regulations placed on the industry. The IT sector in India, which has grown phenomenally over the last two decades, is one such sector, where relaxed government regulations and initiatives played a part towards the success of the sector, notwithstanding the inherent strengths in terms of labour arbitrage, quality of service, strength of management and good financial fundamentals present in most companies in the sector.

This article examines the impact of the FY13 Budget and other initiatives taken by the Government of India to directly and indirectly promote the IT sector in India.

Taxation aspects:

  1. Increase in tax deductions on in-house R&D expense:

    It is a common fact that the IT sector in India generally excels in providing easily replicable offerings such as Application Development and Maintenance and BPO services. However, in recent years, some Indian IT companies, particularly the Big4- Tata Consultancy Services (TCS) , Infosys, Wipro and HCL Tech have taken steps to move up the value chain by offering high end services in the areas of cloud computing, mobile analytics, etc.

    In this context, the increase in weighted tax deduction allowed on in-house R&D expense from 150% to 200% till FY17, as announced in the Union Budget of FY13, would definitely incentivize the Indian IT companies to allocate more funds towards R&D. More innovations are thus likely in both the software and hardware segments.

  2. Concessional excise duty of 6% for HS8471 products:

    The FY13 Budget increased the standard rate of excise duty from 10% to 12% on many manufactured goods. However, for HS8471 products, manufactured by the indigenous IT hardware sector, the already "concessional" excise duty rate was raised by 1% to 6%. (HS8471 products include manufacturing of computers, processors, hard disk drives, DVD/CD drives, flash memory, other combo drives, etc.)

    The continued concessional excise duty rate, and the relatively lower increase of the same, indicates that the government wants to support the growth of the Indian IT hardware manufacturing sector.

  3. Advance Pricing Agreement (APA):

    APA is essentially a customized contract between a taxpayer and a taxing authority on an appropriate transfer pricing methodology for a fixed set of transactions over a certain period of time (maximum five years) in future.

    There have been lot of litigation related with the taxation of international software payments due to transfer pricing issues and diverse views were taken by different Indian High Courts. So, the introduction of APAs' is likely to provide some relief towards reducing the ambiguities connected with the taxation of international software payments, which should in turn, encourage Foreign IT companies to continue to have more set-ups in India for the export of IT services to other parts of the world.

Policy initiatives taken by the Indian government:
  1. FY13 Central plan outlay by the Department of Information Technology (DIT)

    The DIT Central plan outlay was increased by 86% to Rs 5362 crores in FY 2013. The 12th Plan for the IT sector envisions e-Development of India through a multi-pronged strategy of e-Infrastructure creation, fast-tracking of e-Governance, and promotion of electronics hardware manufacturing, IT and ITES industries, etc.

    The focus of the Plan is on the new and ongoing schemes relating to (i) e-Government (Rs 1729 crores), which includes Electronic Governance (Rs 975 crores) and NIC (Rs 754 crores); (ii) e-Learning (Rs 533 crores), which includes National Knowledge Network (Rs 360 crores) and Manpower Development including Skill Development in IT (Rs 127 crores). The ambitious Unique Identification (UIDAI) project should also open vast opportunities for the IT industry. Further, the FY13 National Skill Development Fund aims to train about 6.2 crores persons in 10 years, which will increase the country's talent pool immensely.

Conclusion: The taxation measures and policy initiative taken by the Indian government should in all probabilities continue to promote the growth of the IT sector in India and bring in more transparency. However, there were two key expectations from the government in the last budget, which were not met, viz. (a) re-introduction of tax holidays related with software technology parks (STP) and export oriented undertakings (EOU), which expired for the whole sector on 31st March, 2011. These would have definitely helped the smaller IT companies, particularly in this current low demand and pricing pressure environment, and (b) removal of Minimum Alternative Tax (MAT) on special economic zone (SEZ) income. While the current measures and initiatives are good, we believe that if these two industry expectations were met, it would have helped further in cementing the exponential growth of the IT sector in India that was witnessed over the last two decades.

Note: The data for this article were obtained from the Income Tax Amendments of 2013 and the website. Opinions published by accounting firms, KPMG and Grant Thornton were also considered.

Click here for the quarterly results of the companies in the Indian IT sector.

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