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  • 8/8/2019 Indian IT - ITeS Industry - Expiry of Income-tax Holiday- Needs a Re-examination

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    IndianIT/ITeSIndustryExpiryofincome-taxholiday:needsare-examination

    KPMG IN INDIA

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    TherapidriseoftheIndianIT/ITeSsectoroverthepastdecadehasbeenwidely

    recognizedandreported.Notonlyhasthissectorperformedstupendouslywell,it

    hasalsoearnedIndiaplentyofacclaimforthescopeandscaleofwork

    undertaken,highlevelsofservice-qualityandsustainedcostcompetitiveness.

    AsperNasscomandCRISIL,theIT/ITeSsectoremploysabout2million

    professionalsmakingitthelargestemployerintheorganisedprivatesectorof

    thecountry.Theavailabilityofdisposableincomehasboosteddemandand

    generatedsubstantialindirectemployment.

    InadditiontothecosteffectiveandhighlyskilledlabouravailableinIndia,the

    income-taxholidayprovidedtotheIT/ITeScompanieshasbeenamajordriving

    forcebehindthegrowthofthesector.

    Today,therearemultiplechallengesbeforethesector,rangingfrommacroto

    microissuesanditremainstobeseenwhetherthesectorisselfsustainableand

    abletogrowwithoutanysupportintheformofincome-taxholidayunderSection

    10A/10BoftheIncome-taxAct,1961,whichiscurrentlysettoexpireon31

    March,2010.

    KPMG,partneringwithCII,haspreparedthisdiscussionnote,documenting

    variousaspectsoftheexpiryoftheincome-taxholiday.Thisreportaimsatgivinga

    balancedperspectiveontheextensionoftheincometaxholiday,withthehope

    thatthereportwouldbeusefulintermsofhelpingthepolicymakerscomeout

    withasuitableproposal.

    Foreword

    Russell PareraChiefExecutiveOfficerinIndia

    KPMGinIndia

    Uday VedHeadofTax

    KPMGinIndia

    2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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    TheIndianIT/ITeSindustryhascomealongway.Indiahasbeenafavoured

    offshoredestinationforoutsourcingITandITeSwork,thankstoanexcellentwork

    forceandconducivetaxenvironmentintheformoftaxholidaybenefitsgivento

    thisindustrybytheGovernmentofIndia.TheIT/ITeSindustryhasbeenenjoyingataxholidayundertheSoftwareTechnologyParkofIndia(STPI)andExport

    OrientedUnit(EoU)schemes.

    WiththesunsetclauseundertheIncome-taxAct,1961,restrictingtheincome-tax

    holidayundersections10A/10B(relatingtoSTPIs/EoUsrespectively)beyond31

    March,2010,thefutureoftheIndianIT/ITeSindustrydoeslookuncertain.Is

    thereaneedforcontinuationoftheincome-taxholiday?WilltheSEZscheme

    effectivelysubstitutetheexpiringincome-taxbenefitundertheSTPI/EoU

    schemes?Thesearesomeofthequestionstheindustryisgrapplingwith,at

    present.Expiryofsection10A/10BwouldtoughencompetitionforIndiavis--vis

    otherjurisdictions.SincethemajorityoftheIT/ITeSindustryoperatesonasmall

    ormediumscale,thereareconcernsrelatingtotheeffectivenessoftheSEZ

    scheme.

    CIIinassociationwithKPMG,theknowledgepartner,haspreparedareporton

    thisissue.Thisreportreflectstheresultsofanindependentsurvey(titledas

    ProjectStake)carriedoutonIT/ITeScompaniesinIndia.

    ThisreportaimstoillustratetheconcernscurrentlyfacedbytheIT/ITeSindustry,

    inordertohelppolicymakerstaketherightmeasurestowardshelpingIndiaretain

    itscompetitiveedgeinthissector.

    S ViswanathanChairman

    CII,Karnataka

    K R GirishConvenerforEconomicAffairsand

    PublicPolicy

    2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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    Executive Summary 01

    Introduction and Overview 03

    Income-tax policy on IT / ITeS Sector 09

    Challenges before the IT / ITeS Sector 13

    About the Survey 16

    Analysis of the Survey Results 17

    Conclusion 25

    Comments from Industry Leaders 26

    Appendix 28

    - Data sources and references

    - Glossary

    Contents

    2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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    1

    TheIndianIT/ITeSsector(alsoreferredtoasthesector)ispredominantlyexport

    oriented,leveragingthecostarbitragetodeliversolutionsandservicestoclients.

    Thegrowthinthesectorhasbeenlargelyduetofactorssuchashighquality

    Englishspeakingskilledlabour,lowcostbaseandincreasingadvantageaccruing

    fromthelearningcurve.

    Atpresent,thesectorinIndiaispoisedtobecomeanepicenterforIT/ITeS

    activities.However,theIT/ITeSsectorinIndiaisfacedwithseriouschallengeson

    manyfrontsincreasingcompetitionfromotherjurisdictions,fastdiminishing

    costadvantageandshortageoftrainedtalenttonameafew.Sofar,ithasshown

    resilienceandkeptpacewiththeestimatedgrowthtopotentiallyachievethe

    targetssetoutfor2010.

    However,expertsareskepticalaboutwhetherthesectorhasmaturedenoughto

    beabletostandtallagainstthesechallengeswithoutanyfiscalsupport,andstill

    proliferate.Evenotherwise,thereisstillalongwaytogoasthereisahuge

    untappedmarket.ItissurprisingtonotethatIndiasITexportsasapercentof

    globalITspendislessthan2percent.1

    Leavingasidetheissuesintrinsictothissector,onecannotlosesightofthe

    contributionthatthissectorhasmadetotheemergenceofIndiaasaneconomic

    power.Inlessthanadecade,thesectorscontributiontotheGDPhasincreased

    manifold,nowcontributingmorethan5percentoftheGDP.Withanexpected

    exportofUSD40billionin2007-08,thesectoraccountsforonefourthofthe

    countrysexports1.

    OneofthereasonsfortheemergenceofanewmiddleclassinIndiaisthevast

    direct(estimatedat2million)andindirectemployment(estimatedtobefour

    timesthatofdirectemployment)createdbythesector.Nodoubtthishasbeena

    greatthrusttogrowingconsumerism,thusdrivingothersectorslike

    infrastructure,realestate,automotivesandtheconsumergoodsindustry.

    TheresultsoftheSurvey(ProjectStake)carriedout;clearlyrevealthatthesectorfeelsthatthereisstillneedforfiscalsupportbywayofextensionoftheincome-

    taxholiday.Theexpiryoftheincometaxholidayisseenasoneofthebiggest

    challengesforthesector.

    Executive Summary

    1 Nasscom data

    2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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    2

    Someofthekeyresultscomingoutofthesurveyare:

    Thereseemstobeaconsensusamongsttherespondentsthattheexpiryof

    theincometaxholidaywillresultinloweringIndiasattractiveindexasthecost

    ofdoingbusinesswouldincrease

    Thepressurewouldbecomparativelyhighonthesmallandmedium

    companies,whoamongothers,maynotbeabletoeffectivelyleveragethe

    SEZscheme

    Almosttwo-thirdsoftherespondentsbelievethattheexpiryoftheincome-tax

    holidaywillhaveanadverseimpactonrecruitmentsand

    ThedemandforanextensionoftheSoftwareTechnologyParkofIndia(STPI)

    andExportorientedunit(EoU)schemesismoreskewedtowardsassistingthe

    smallandmediumcompanies.

    Itisestimatedthattheannualadditionalincome-taxrevenuetotheGovernment

    onaccountofexpiryofsections10Aand10BoftheIncome-taxAct,1961(the

    Act)wouldrangebetweenINR15,000to20,000crores.TheGovernment

    thereforewouldhavetodoabalancingact,andseewhetherthisincrementaltax

    revenuewouldjustifydoingawaywiththeincome-taxholidayalltogether,

    especiallygiventhefactthattheperformanceofthissectorhasasignificant

    effectonthewholeeconomy.

    AwellthoughtoutstrategicmovefromtheGovernmentcanhelpthecountry

    maintaintheedgecreatedbythesectorintheglobalmarketandpositionIndiaas

    theleadingproviderofIT/ITeSservices.

    2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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    Introduction and overview

    Today,Indiaisoneofthefivecountriesthatshare50percentoftheworld

    production.2 Thegrowthstoryhasbeendrivenprimarilybyrobustgrowthinthe

    servicessector,andtoalesserextent,themanufacturingsector.

    ThemostevidentgrowthhasbeenobservedintheIT/ITeSsector,whichwas

    expectedtoabletosustainitsgrowthmomentumovertheyears.Apartfromthe

    significantcontributiontotheeconomy,thesectorhasalsogivenbirthtoanew

    leagueofentrepreneurs,whohavebeensuccessfulinspreadingtheirwings

    globally,puttingIndiaonthemapofglobalserviceproviders.

    Someofthefacetsofthesectorhavebeendiscussedinthefollowingparagraphs.

    Size of the SectorThesectorisexpectedtocrosstheUSD50billionmarkin2007-08.Theprojected

    breakdownfortheverticalsisasbelow(thefiguresexcludethehardware

    category).

    Veryclearly,ITservicescontinuetobethelargestverticalofbusinessinthe

    sector.

    Composition of the SectorIndiahasaround5,000softwareandsoftwareservicescompanies.Thecountof

    companiesisskewedtowardsagreaternumberofsmallandmediumcompanies,

    whoaretusslingtomeetthechallengesinincreasingtheirtoplineandthebottom

    line.Ontheotherhand,thelargeIndiancompaniesdominatethemarket,and

    currentlycontributearound45percentofthetotalITexportsfromthecountry.3

    Thesectorhasalsobeenabletolurealargenumberofmultinationalscaptives

    aswellasthirdpartyserviceproviders.

    Vertical Amount in USD billion

    ITServices 31.0

    BPO/CRMactivities 12.5Engineeringservices,R&Dandsoftwareproducts 8.5

    Total 52.0

    2 GDP on PPP basis, source:Wikipedia website3 Nasscom and IBEF data

    3

    Contribution to the GDP by the IT/TeS Sector ( all figures are in % )

    ThegrowingcontributionbytheIT/ITeS

    Sectorisclearlyvisible

    Source:Nasscomdata

    2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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    Export and domestic marketsAfteralongwait,Indiasshareintheworldtradehasgoneonanincreasing

    trajectory,andisexpectedtocross2percentin2008-2009.Withthetotalexports

    expectedtobearoundUSD150billionfor2007-08,ifoneweretogobypress

    articles,theUnionMinistryofCommerceandIndustryistargetingUSD200

    billionfor2008-09.

    Thegrowthinexportshasonceagain,beenprimarilypropelledbytheservices

    sector.Needlesstomention,theSoftware,BusinessandFinancialServices

    sectorshaveplayedapivotalroleinthisregard.

    TheexportsearningsoftheIT/ITeSsector,fortheFY2007-08,areestimatedto

    beoverUSD40billion,agrowthof30percentoverthepreviousyear.

    Although,exportshavebeenleadingthegrowthinthesector,onecanalso

    observeasteadygrowthinthedomesticmarket.Thedomesticearningsofthe

    sectorintheFY2007-08areestimatedtobeUSD12billion,agrowthof42

    percentoverthepreviousyear.

    TheUSandUKcontinuetoremainthelargestexportmarketswithsharesof61

    and18percentrespectively.Lately,companieshavealsopenetratedintoother

    geographiessuchasEMEA(i.e.Europe,MiddleEastandAfrica)andAsiaPacific

    whichshowgreatpotentialintheyearstocome.

    ConsideringthattheUSisadominantmarket,andakeycontributortothetotal

    softwareexportsofIndia,therecessionarytrendsintheUScouldhaveanegative

    impactonthesector.However,despitethis,NASSCOMisconfidentthatthecountrywillbeableachievetheUSD60billionexporttargetby2010.

    Source:EconomicSurvey2007-08andNasscomdata

    Exports from India (in USD billion )

    4

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    IT / ITeS marketsToday,technologyhasbecomeapre-requisiteforanybusiness,andthiscanbe

    observedfromtherapidproliferationoftheservicesrenderedbythesector.The

    Banking,FinancialServicesandInsurances(BFSI)arethelargestmarketsfor

    IndianIT/ITeSexports,withashareof40.4percentinFY2006-07.Thenext

    industryisthetechnology/telecomandmanufacturingindustrywhichaccounts

    for19.1and15percentrespectivelyoftheIT/ITeSexportmarket.

    Industry categorisationIndianentrepreneurscontinuetoleadtheITservicessector,havinga70percent

    marketshare.Ontheotherhand,theBPOsectorisdominatedbyforeigncaptivesandforeignserviceproviderswhoholdashareofaround45percent.

    Source:Nasscomdata

    Markets for Indian IT/ ITeSexports in 2006-07

    Market share of the providers in IT / Product development &Engineering segment ( 2006-07 ) USD 23 billion

    Market share of the providers in the BPO segment (2006-07)USD 8.2 billion

    Source:Nasscomdata

    Source:Nasscomdata

    5

    2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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    EmploymentThegrowthoftheIT/ITeSsectorhascontributedtremendouslytoboththe

    economicandsocialdevelopmentofthecountry.AccordingtotheMinistryof

    LabourandEmployment,ITservicesaccountsfor12percentofIndiastotal

    employment,thusmakingitthelargestemployerintheorganisedprivatesector.

    AsperNASSCOM-CRISILstudy,thedirectemploymentinthesectorisexpected

    totouch2millioninFY2007-08,anincreaseof19percentoverthepreviousyear.

    Theindirectemploymentgeneratedisalsoimpressive.Itisestimatedthatevery

    jobinthesectorcreatesfouradditionaljobsthroughaninducedmultipliereffect.4

    Mergers and AcquisitionsTheyear2007saw91dealsofprivateequityinvestmentsinthissector,byfarthe

    maximumamongallthesectors.5

    Thefollowingcontributetotheattentionthatthissectorisgarnering:

    a) Strategicmovesbythecompaniesforinorganicgrowth

    b) Risingglobaltechnologyspending

    c) Positiveprospectsofthesectorintheyearstocome

    d) Redrawingofboardroomstrategieswithrespecttocorefunctionsand

    riskhedging.

    4 Nasscom and CRISIL5 Nasscom data

    Source:Nasscomdata

    Direct Employment (in million )by the IT / ITeS Sector

    6

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    Life Cycle of the Indian IT / ITeS Sector Where It Stands TodayEveryindustryhasalifecycleandgoesthroughvariousphases.Likewise,theIT/

    ITeSindustrystrajectoryhasalsobeenmappedintheattachedchart.

    Theshiftfromtheintroductiontogrowthphasewasmarkedwiththeoff-shoring

    oflowendandbackofficeservices.Inthegrowthphase,thesectorwitnessed

    highgrowthratesofover30percent.Withagoodtrackrecordofdeliveryof

    qualityservice,thequantityofoff-shored/outsourcedworkalsosawupward

    movement.

    Asthesectorhasmovedfromthegrowthphase,itisnowwitnessingincreasing

    competitionfromothercountries.However,Indiastillcontinuestoenjoytheearly

    moveradvantage,asaresultofwhichalargenumberofMNCsareoperatingin

    India.

    Thecontinuedprogresscanalsobewitnessedwiththeincubationofalarge

    numberofKPOsandR&Dcentersinthecountry(thepremiseoftheseindustries

    beingtalentarbitrage),thusmovingupthevaluechain.

    Thesectoriscurrentlyinthetransitionmodefromthegrowthtothematurity

    stage.Thefollowingcanbeidentifiedwiththetransitionphase:

    Dropinthegrowthratesthegrowthrateshavegraduallyfallenfrom

    the30plusmarktothehigher20s,whichisfurtherexpectedtofallto22-24percentinthecomingyears

    Upwardmovementinthevaluechainthenatureofservicesrendered

    hasalsomatured.

    Although,itwouldbeachallengingtasktomaintainthepresentgrowthrates,the

    aimseemstobeatgettingabiggershareintheuntappedmarketssoasto

    increasetheshareofIndiancompanies.

    7

    2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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    OutlookAtamacrolevel,theprospectsforthesectorappeartobepositive.Theglobal

    technologyspendingfor2007isestimatedtobeUSD2,487billion(including

    hardware),andisexpectedonlytoincrease.ThetotaladdressablemarketforFY

    2007-08wasestimatedatUSD250billionand190billionforIT-Engineering

    servicesandBPOservicesrespectively.6

    Indiaholds60percentanda38percentshareintheaddressedglobalsourcing

    marketsofIT-EngineeringandBPOservices,respectively.6 However,thereisstill

    asignificantuntappedmarket(seeaccompanyingdiagrams),whichmeansthat

    thereisenoughheadroomforfurtherexpansionofthemarket.

    Theroadaheadmightnotbeallthatsmoothandthesectoriscurrentlyfacing

    challengesonvariouscounts,whichemanatefromlocalaswellasglobal

    economicandpoliticalfactors.Therecenttimeshaveshownaclear

    interdependencebetweennations.TherecessionarytrendsintheUShavealready

    startedhavinganadverseimpactonthesectorsgrowthrates.

    Toanextenthowever,thesectorhashedgeditselfagainsttheUScrisisthrough

    geographicexpansiontothenon-USmarketslikeEMEA(i.e.Europe,MiddleEast

    andAfrica)andAsiaPacific.However,onecannotlosesightofthefactthattheUS

    stillholdsalionsshareoftheIndianIT/ITeSexports.

    Therealsoappearstobeasilverlininginthemiddleofthiscrisis.Thereisone

    schoolofthoughtwhobelievesthatpressuresonmarginswouldinduce

    companiestoexploremoreopportunitiesforcostcutting,therebyincreasing

    opportunitiesfortheIndianIT/ITeScompanies.Wehaveseensometrendsinthe

    currentyearlendingsupporttothisview.

    6 Nasscom data

    Source:Nasscomdata Source:Nasscomdata

    8

    2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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    Income-tax policy on IT / ITeS Sector

    The journey so farTheGovernmenthasplayedapivotalroleinactingasacatalysttotheIT/ITeS

    sector.TheincentivesandSOPstothesectorhavehelpeditgrowtoitspresent

    sizeandstature.

    Themajormilestonesrelatingtotheincome-taxincentiveshavebeenidentified

    below.

    9

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    Current income-tax environment for IT/ITeS companiesCurrently,unitsoperatingintheIT/ITeSsectorcanavailincome-taxdeduction

    undersection10A/10BoftheIncometaxAct,1961(theAct).Thesubstanceof

    boththesectionsremainsthesameandthesesectionsintendtoprovidea

    deductionforprofitsgeneratedfromexportsofcomputersoftwareandIT/ITeS

    services.

    Whilesection10AisapplicableforunitsregisteredundertheSTPIscheme,

    section10BappliestounitsestablishedasEoUs.

    Section10Aand10Bhadasunsetclauseof31March,2009,whichmeantthat

    thedeductionsunderthesesectionswouldnotbeavailablebeyond31March,

    2009.Basedonconcernsbeingraisedbythesector,theFinanceMinister,vide

    theFinanceAct,2008,hasextendedthedeductionsundersection10Aand10B

    byanotheryear(i.e.till31March,2010).However,theFinanceMinisterhasnot

    committedtoanyfurtherextensionoftheincome-taxholiday,andhasleftitopen.

    Itwouldberelevanttonotethatinanycase,theprovisionsofMinimum

    AlternativeTax(MAT)applytosuchcompanies,eveniftheyareeligibletoclaim

    income-taxbenefitsundersection10A/10B.However,taxespaidunderMAT

    (currently11.33percentofthebookprofits)canbeclaimedasacreditin

    subsequentyears,subjecttospecifiedconditions.

    Inthemeanwhile,theSpecialEconomicZonesAct,2005waspassed.

    Accordingly,section10AAwasinsertedintheActin2006toprovideataxholiday

    forunitsoperatingoutofanapprovedSpecialEconomicZone.

    Thedeductionundersection10AAisavailableoveraperiodof15yearsinthe

    followingmanner:

    First five years deductionfor100percentofprofitsderivedfrom

    exports

    Next five years deductionfor50percentoftheprofitsderivedfrom

    exports

    Subsequent five years deductionof50percentoftheprofitsof

    exports,subjecttoadditionalconditionsrelatingtore-investment.

    MATprovisionsarealsonotapplicabletoanSEZunit,thoughitisnowbeing

    debatedbytheEmpoweredCommitteewhethersuchanexemptionshould

    continue.

    TheSEZregime(section10AA)hasbeendubbedasasubstitutefortheSTPIand

    EoUscheme(section10Aand10B).However,asdiscussedsubsequentlyinthe

    report,owingtopracticalreasons,thismightnotbethecase.

    Thereseemstobeagapbetweenthevisionofthelegislatureandtheneedsof

    theindustry.Thereislackofclarityonthewayforward,beyond31March,2010,

    especiallyforthesmallandmediumenterprises,whodonothavethefinancial

    resourcesandfacevariouschallengestomovetoanSEZ.

    10

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    SEZ the Indian lapAfteritssuccessinChina,variouscountrieshavetriedtoadopttheSEZmodel.

    AccordingtotheWorldBankReport,asof2007,therearemorethan3,000

    projectstakingplaceintheSEZsin120countriesworldwide.

    ThefollowingarethekeydifferencesbetweentheChineseandIndianSEZmodel.

    Source:Wikipediaandotherpubliclyavailabledatabases

    11

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    Although,theSEZscheme(inIndia)islikelytohelpaugmentexportsanddevelop

    thelessdevelopedregionsinthecountry,thepoliciesoftheschemearenotwell

    suitedtotheIT/ITeSsector,whichdespitebeingexportorientedworkson

    differentparametersascomparedtootherindustries.

    Locational RestrictionsSEZsaretypicallylocatedoutside

    citylimitsandimposelocational

    restrictions.Thishasserious

    implicationsonmanpowermobili-

    tyandtransportationcosts.Also

    beinganon-pollutingsectorwith

    littlephysicalexports,itwouldbe

    betterifitwerenotrestrictedto

    aparticularlocation.

    Regulatory constraintsThereareregulatoryconstraints

    onmigrationofexistingopera-

    tionstoanSEZ.Thistypically

    makestheSEZsaviableproposi-

    tiononlyforthelargercompa-

    nies,whohavelargeandgrowing

    operations.

    Area of operationsTheSEZschemeismoresuited

    forthelargeplayers.Theguide-

    lineslaydownaminimumarea

    requirementof10hectares

    (approximately24.7acres)foran

    IT/ITeSSEZ.Althoughthereisno

    suchlimitforanSEZunit,getting

    smallerareasonleasecouldbea

    challenge.

    12

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    Challenges before the IT / ITeS Sector

    Poor infrastructureAsperarecentsurveyconductedbytheWorldEconomicForum,inadequate

    supplyofinfrastructureisthemostproblematicfactorsfordoingbusinessinIndia.

    ItisstartlingtonotethatIndiasinternetbandwidthranks87thaspertheWorld

    TechnologyReport.

    Thesectorhasbeenconstantlydemandingbetterinfrastructure(connectivity,

    housing,electricity,watersupply).TheinfrastructureoftheexistingTierIandTier

    IIcitiesisinsufficienttomatchtheexponentialgrowthwitnessedinthesector

    Bangalorecity,whichbooststobetheITcentreofIndiaisaclassicexample.

    Availability of manpowerThesectoriscurrentlycaughtintheviciouscircleofconstraintsintermsofsupply

    oftrainedmanpower,highattritionratesandeverincreasingsalarycosts.

    Shortage in the supply of talent

    Thesuccessofaservicesector,beingahumanintensivesector,highlydepends

    uponthequalityoftheworkforce.TheIT/ITeSsectorhassofargallopedonthe

    backoftalentwhichscoreshighonquality,innovationandpreciseness.ThisisoneofthedistinctadvantagesthatIndiahasoveritscompetitors.

    Notwithstanding,therearegrowingconcernsaboutmismatchofthetalentpool,

    especiallyatthemiddleandtopofthepyramid.Thecountryisfacedwiththe

    largestshortagesinthemiddleofthepyramid.Thescenarioforthefuturedoes

    notseemtobecomforting.AsperNASSCOM-McKinseyReport,2005,therecould

    beashortfallof500,000graduatesby2010.

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    High attrition rates

    Thesectorfacesaseriouschallengeinattritionratesaswell.Owingtothegap

    betweendemandandsupply,trainedresourcesareabletocommandhigherpay

    packets,andfrequentswitchingofjobsinthesectorseemstohavebecomea

    regularphenomena.

    TheattritionratesarehigherattheBOPandMOPlevels,andthelargerportionof

    theworkingpopulationliesintheseregions.

    Rising wages

    Increasingemploymentcostsposesoneofthebiggestthreatsasthisconstitutes

    oneofthelargestproportionsofexpensesintheprofitandlossaccount.While

    theaveragewageappreciationinthedevelopingworldisaround5percent,the

    correspondingincreaseinIndiaismuchhigher.Ifthetrendcontinues,Indiawould

    loseitscostadvantage,makingitlessattractivevis--visotheremerging

    destinations.

    Increasing operating costsInflationhoveringover11percent,wageappreciationaveragingat10-20percent,

    combinedwithpoorinfrastructureandregulatorybottlenecks,arepurgingthecost

    advantageIndiahasbeenoffering.Ontheotherhand,theotheremerging

    locationsareprovidingSOPs,superiorinfrastructureandvariousotherbenefitsto

    attractinvestmentsintheIT/ITeSsector.

    Instability of currencySincethesectorpredominantlyreliesonexportmarkets,fluctuationinthevalue

    ofIndianRupeevis--visothercurrencies(especiallyUSD)isleavingtheexporters

    inatussle,andishavinganegativeimpactonthesector.

    Pyramid Approach

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    Competition from emerging destinationsIndiahasbeensuccessfulinattainingthestatusofthemostpreferredoutsourcingandoffshoringdestination.However,as

    thesectormovesfromthegrowthtothematuritystage,thechallengesfacedbythesectorarealsoontherise.

    GivenbelowisacomparisonoftheBrazil,Russia,IndiaandChina(BRIC)nationsbasedonthepolitical,economic,social

    factorsandthecostsineachcountry.WhilethisreportgivesacomparisonoftheBRICnations,Indiacontinuestohave

    competitionfromvariousothercountriessuchasVietnam,Philippines,MalaysiaandtheCentralandEasternEuropean

    countriesthatareopeningdoorstotheoff-shoringandoutsourcingbusiness.Theemergingdestinationsarealsooffering

    variousSOPs/incentives,lowcostleverageandofferingholisticdevelopmenttoattractforeigninvestment.

    Source:EconomicIntelligenceUnit,KPMG-NasscomReportonEmergingDestinationsandotherpubliclyavailabledata.

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    About the Survey

    KPMGandCIIconductedthissurveywiththeprimaryobjectiveofprovidinga

    balancedperspectiveofthesector,specificallyontheeconomicimplicationsof

    theexpiryoftheincome-taxholiday.Theviewsarebasedonananalysisofthe

    feedbackreceivedfromtherespondentsandonthebasisoftheinformation

    collectedviasecondarydataanalysis.

    Forthepurposeofthesurvey,aquestionnairecontaining25questionswassent

    outtorespondentsfromtheIT/ITeSsectoracrossthecountry.

    Therespondentstothesurveyrepresentamixofsmall,mediumandlargecompanies,operatingacrosssegmentslikeIT,ITeS,R&Detc.

    Forthepurposeoftheanalysis,companieshavebeensegregatedonthe

    followingbasis:

    a) CompanieswithturnoverlessthanINR100croreshavebeen

    categorisedassmallcompanies

    b) CompanieswithturnoverbetweenINR100croresandINR1000crores

    havebeencategorisedasmediumsizecompanies

    c) CompanieswithturnovermorethanINR1000croreshavebeen

    consideredaslargecompanies.

    SmallandmediumcompanieshavebeenreferredtoasSMEsegment.

    Profile of the respondents

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    Analysis of the survey results

    Pervasiveness of the STPI / EoU regimeTheresponsesshowthatasignificantportion(88percent)ofthecompaniesin

    thesectorisavailingtheincome-taxholidayavailableundertheSTPI/EoU

    regime.

    Veryclearly,theincome-taxholidayundersection10A/10Bisrelevantforalarge

    sectionofthesector,andthesunsetofthesesectionswouldhaveasevere

    impactontheprofitability.

    Biggest contributor to the success of the IT / ITeS SectorThesuccessstoryofthesectorcanbeattributedtovariousfactorssuchas

    availabilityofarichtalentpool,availabilityofthetaxholiday,relativelylowercosts

    andentrepreneurialskills.Throughthesurvey,wehavetriedtomapoutthe

    relativecontributionofthesefactors.

    Fortytwopercentoftherespondentsbelievethatthetalentpoolhasplayedthe

    mostimportantroleintakingthesectorwhereitstandstoday.Thelowcost

    leveragethecountryoffersrankssecond32percentoftherespondentshave

    identifiedlowcostsasbeingthebiggestcontributortothesuccessofthesector.

    Theincome-taxconcessionsavailedbythecompaniesisthethirdmostpreferred

    choice,with23percentoftherespondentschoosingitisasthereasonforthe

    successofthissectorandbeingchosenasthemostpreferreddestination.

    ParticularsRegistered

    under STPI /EoU scheme

    Not registered withSTPI /EoU scheme

    Companiesenjoyingincome-tax

    benefitsunderSection10A/10B88 NotApplicable

    Companiesnotenjoyingincome-

    taxbenefitsunderSection10A/

    10B

    7 5

    Percentage of respondents identifyingthe various factors as their first choice

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    Biggest challenge for the IT / ITeS SectorTheyear2007wasmarkedwithnumerouschallengesfortheIT/ITeSsector.The

    USslowdown(whichhashadanimpactontheglobaltechnologyspending),

    fluctuationoftherupee,risingwagesandoperatingcosts,coupledwithtalent

    supplyconstraints,havetestedtheresilienceofthesector.

    Oneofthesectorsbiggestbugbearshasbeentheexpiryoftheincome-tax

    holiday,whichwasproposedtoexpireon31March,2009.Aftermuchdebate,the

    FinanceMinisterhasextendedtheschemebyanotheryear,anditwouldnowbe

    expiringon31March,2010.Thishascomeasabreather,especiallytothesmall

    andmediumcompaniesinthesector,whoconstantlyfacechallengesandfor

    whomtheSEZregimedoesnotappeartobeapracticalsolution.

    Thirtytwopercentoftherespondentsbelievethattheexpiryoftheincome-tax

    holidayundersection10A/10Bisthebiggestchallengeforthesectortoday.

    Twentyfivepercentoftherespondentshaveoptedforrisingcostsasthebiggest

    challenge.

    Itisinterestingtonotethatrespondentsrepresentingthelargercompanieshave

    identifiedavailabilityoftrainedmanpowerasthebiggestchallenge.Clearly,it

    wouldseemthatsincethesecompanieshavethefinancialstrengthtomovetoan

    SEZlocation,expiryofthebenefitundersection10A/10Bseemstobeofa

    lesserconcern.

    Recruitments and compensation levelsThesectorhasbeeninstrumentalintheemergenceofanewmiddleclass

    throughthecreationofenormousjobopportunities.Thesectorhasalsoutilised

    thepotentialofIndiasvastpopulation.

    Amajorityoftherespondentsbelievethatthewithdrawaloftheincome-tax

    holidaywillburdentherecruitmentandcompensationlevels.Aslowdownonthe

    recruitmentcouldhavealargereconomicimpactasthegrowthinthesectorhas,

    inter alia,beenastimulusforthegrowingconsumerism(demand),increasing

    thrustoninfrastructureanddrivingtherealestate,automotiveandconsumer

    goodsindustry.

    Percentage of respondents identifying

    the various factors as the first choice

    BiggestchallengetotheIT/ITeSSector

    Sixtysixpercentoftherespondents

    believethattheexpiryoftheincome-

    taxholidaywillhaveanadverse

    impactonrecruitments.Many

    respondentsfromthelargecompa-

    niessaidthattheindustrywouldgo

    slowonrecruitments.

    Ninetytwopercentoftherespon-

    dentsareoftheviewthatthesector

    wouldbeunabletomaintainthe

    increasesinthecompensationlevels.

    Allrespondentsfromthelargecom-

    panieshavealsotakenthisview.

    Majorityoftherespondentsrepre-

    sentingR&Dcompanieshavealso

    chosenthattheimpactwouldbefeltonboth,recruitmentsandthecom-

    pensationlevels.

    Sixtysevenpercentoftherespon-

    dentsrepresentingMNCsalso

    believethatthesectorwouldgoslowonrecruitmentsand90percent

    alsoconsidersustainingcompensa-

    tionlevelstobeagreaterchallenge.

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    PricingThewithdrawaloftheincome-taxholidaywillforcecompaniestorevisittheir

    pricingstrategies.Thisviewisalsosupportedby90percentoftherespondents.

    Fiftypercentoftherespondentsrepresentingcaptiveserviceprovidersareofthe

    viewthattheexpiryoftheincome-taxholidaywouldleadtoanoverallincreasein

    thecostofdoingbusiness.Theaimofmostoutsourcingandoff-shoringisto

    enjoythecostleveragethatajurisdictioncanoffer.Itisanobrainerthatwitha

    potentialoverallincreaseinthecostofdoingbusinessinIndia,theIndia

    attractivenessindexwouldmostlikelysuffer.

    Most affected segmentSeventysevenpercentoftherespondentshaveevincedthatthesmalland

    mediumcompanieswouldbemostaffectedwiththewithdrawaloftheincome-

    taxholiday.

    ThesuccessoftheSTPI/EoUschemeisnotsolelybasedontheincome-tax

    incentivesprovidedtothesector,butalsotheeasewithwhichthecompanies

    havebeenabletocarryonoperationsowingtominimumregulatoryandlocational

    constraints.WhileSEZmaybeaneffectivemodeltostimulatethecountrys

    exports,income-taxincentivesprovidedbythisschemearenottheonlyreason,

    buttheeaseofoperatingalsoplaysanimportantrole.

    Doingawaywiththetaxholidaycouldpotentiallywidenthecompetitivegap

    betweentheSMEsandthelargercompaniesinthesector.Eightyninepercentof

    therespondentsalsobelievethesame,andwhatisinterestingtonoteisthatthis

    viewisalsosharedbyalltherespondentsfromthelargercompanies.

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    India vs other emerging destinationsAlthoughIndiaistodayconsideredtoapreferreddestination,onlyaround250out

    of500Fortunecompaniesareclientsofthesector.Thereisahugeuntapped

    marketwhichisyettobeexplored.Otherjurisdictionshavealreadycomeupto

    speedonmakingtheirpresencefeltinthisspace.Thesecountriesareoffering

    variousincentivesforsettinguptheunitswithawelllaidinfrastructure.Alarge

    numberofIT/ITeScompanies(bothIndianandforeign)arealreadyoperatingin

    countrieslikeChina,Malaysia,Canada,BrazilandHungary.

    OtheremergingdestinationssuchasVietnam,PhilippinesandBrazilarealso

    makingtheircountriesviableforoff-shoringandoutsourcingofbusiness.Besides

    offeringvariousincentives,othermeasuresarebeingtakentoimprovetheeducation,ITandsocialinfrastructureinthesecountries.

    Eightytwopercentoftherespondentsareoftheopinionthatwithdrawal

    oftheincome-taxholidaywouldresultinadditionalpressureonIndia.The

    countrywillfinditdifficulttocompetewithotheremergingdestinations

    likeVietnam,Philippines,RomaniaandEastEuropeancountries

    EightyfourpercentoftherespondentsfromMNCsareoftheviewthat

    Indiawouldloseitsedgeoverothercompetingdestinations

    ConsideringthattheR&Dcompanieswouldfocusmoreontalent

    arbitrageratherthancostarbitrage,onewouldhaveexpectedthatthe

    responsesfromtheR&Dcompanieswouldbedifferent.However,a

    significantportionoftheresponsesfromR&Dcompanieshasalso

    followedthesametrend,andisoftheviewthatthewithdrawalofthe

    income-taxholidaymayforcecompaniestolookatotherlocations.

    Itseemsthatthewithdrawaloftheincome-taxholidayisdefinitelygoingtoadd

    onemoreareaofconcernforthesector,andIndiamayfinditdifficulttoretainits

    attractivenesswiththeMNCs.

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    Is the SEZ an effective substitute to benefit all segments ofthe sector?ThesuccessoftheSTPImodelisclearlyvisiblewiththeincreaseinthenumber

    ofregisteredSTPIunits.

    TheSEZhasbeenenvisagedasaneffectivemodelthatwouldfurtherboostthe

    exportsofthecountrywithgloballycompetitiveinfrastructureandbetter

    utilizationofresources.However,manyareoftheviewthatthemodelsupports

    onlythelargercompaniesinthesector.AspertheSurvey,73percentofthe

    respondentshavesaidthatthemodelwillbenefitonlythelargercompanies.

    Further,78percentoftherespondentsareoftheviewthattheSEZschemeisnot

    aneffectivesubstituteforwithdrawaloftheSTPIScheme.

    Althoughthelargerenterprisesarebettersuitedtoavailthebenefitsofferedby

    thescheme,manyofthelargecompaniesalsoconsidertheSEZSchemetobean

    ineffectivesubstitutetotheexistingSTPIregime.

    Increase in the number of STPI units (operating units only)

    Units as on March 2001 Units as on March 2007

    2,895 6,321

    Respondents view on the segments most benefitted with theSEZ policy

    Source:STPIAnnualReport(2004-05)andAnnualReportonInformationTechnologybythe

    MinistryofCommunicationsandInformationTechnology(2007-08)

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    Will the SEZ result in full capacity addition?AninterestingissuerelatingtotheSEZschemeiswhetheritwouldresultina100

    percentnewcapacitybuildup,ortherewillitaffectthecapacitiesalreadybuilt

    underthenon-SEZschemes.Oneshouldbearinmindthatanymigrationofwork

    fromtheexistingcapacitiestotheSEZsmayimpacttheutilityofexisting

    capacities.

    TheresponsefromtheSurveydoesnotseemtobeveryconvincingonthispoint.

    Eightysevenpercentoftherespondentsbelievethatduetocommercialand

    practicalreasons,therewillbediversionofbusinessfromtheexistingcapacities

    totheSEZunits(significantorotherwise).Thismayrendertheexistingcapacities

    redundant.

    Biggest challenge relating to the SEZ schemeSEZrequireslargescaleoperationstoenjoyeconomiesofscale.Twentyseven

    percentoftherespondentshaveselectedtherequirementrelatingtothescaleof

    operationsasthebiggestdifficultywiththescheme.Anequalpercentofthe

    respondentshavecitedregulatoryconstraintsasthebiggestchallenge.

    Regulatory constraints and scale of operations are biggestchallenges of the SEZ policy

    Percentageofrespondentsconsideringthevariousfactorsasthe

    biggestchallengeundertheSEZregime

    22

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    What lies ahead Strategies to retain marginsWithincreasingcompetition,globalslowdown,risingwagesandcurrency

    fluctuation,companiesarealreadyfindingitdifficulttoretaintheirexisting

    margins.Therespondentswereaskedonwhatstrategiescompanieswouldlook

    atformaintainingtheirmargins.

    Alargechunkoftherespondentshaveindicatedthatcompanieswouldneedto

    introspect,andworktowardsincreasingtheproductivityandre-engineering

    processes.

    Infact,companiestodayareworkingtowardsincreasingtheirutilisationratesand

    haveresortedtocostoptimisation.

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    Fiscal supportAwhopping97percentoftherespondentsbelievethattheincome-taxholiday

    shouldbeextendedfurther.However,itwouldbeinterestingtonotethatonly34

    percentrespondentsareoftheviewthatallsegments(intermsofsize)ofthe

    sectorwouldneedfiscalsupport.Theother63percentoftherespondentsareof

    theopinionthattheincome-taxholidayshouldbeextendedfortheSMEsegment

    only.

    Itisclearthattheresponseshavebeenbalancedinsofarastheyemphasizeon

    theneedtosupportthesmallerandmediumcompaniestohelpthemgotothe

    nextlevel.

    Respondents view on extending the fiscal support for 5 and 10 years

    24

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    Conclusion

    Theresultsofthesurveygiveagoodinsidersviewsonthe

    matter.Therespondentsseemtobelievethatthesunset

    clauseofthesection10A/10Bmayputthesectoronthe

    backfoot,especiallywithreferencetosegmentswherethe

    countryisincompetitionwithotherjurisdictions.Thereisa

    consensusontheneedforcontinuingfiscalsupport,andan

    extensionoftheincome-taxholidayundersection10A/10B.

    Theresultsofthissurveyestablishbeyonddoubtwhythe

    issueofexpiryoftheincome-taxholidayhasemergedasthesinglebiggestchallengeforthesector.

    Someofthetakeawaysfromthesurveyare:

    Indiasattractiveindexwouldbeadverselyimpacted

    asthecostofdoingbusinesswouldincrease

    Thepressurewouldbehigheronthesmalland

    mediumcompanies,whoamongothers,maynot

    beabletoeffectivelyleveragetheSEZscheme

    Almosttwo-thirdsoftherespondentsbelievethat

    theexpiryoftheincome-taxholidaywillhaveanadverseimpactonrecruitments

    ThedemandforanextensionoftheSTPI/EoU

    schemesisclearlyinfavorofassistingthesmall

    andmediumcompanies.

    Itisestimatedthattheannualadditionalincome-taxrevenue

    totheGovernmentonaccountofexpiryofsections10A/

    10BwouldrangebetweenINR15,000to20,000crores7.

    TheGovernmentwilldefinitelyhavetoweighthisrevenue

    sacrificevis--visthelargereconomicbenefits.Giventhe

    sheerscaleofemploymentanddisposableincome

    generated,anyslowdownoranegativeimpactonthesector

    willalsohaveafarreachingeffectonaconsumerlead

    economyfortheothersectors.

    Thoughonemayclaimthatthesectorhasbeenseeing

    exorbitantgrowthratesandiswellpositionedtofunction

    evenwithoutataxholidaybenefit,theneedofthehouristo

    ensurethatthesectorcontinuestogrowandcapturethe

    untappedmarkets.Withgrowingcompetition,andincreasing

    complexityinoperations,thecountryneedstoensurethatit

    doesnotloseitscompetitiveedge.

    7 Computed subject to assumptions and using/ extrapolating data of NASSCOM and other sources. It

    has been assumed that the tax rate would be constant at 34 percent.

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    Issue: DoyoubelievethattheIndianIT/ITeSindustryneedsfurtherfiscalsupportintheformofanextensionof

    theincome-taxholidaybenefitsundersection10A/10Bof

    theIncome-taxAct?

    Comments: Yes.TheIndianITindustryhassubstantialoperationsbywayofon-sitedevelopmentofcomputer

    softwareinrespectofwhichsubstantialcorporatetaxesare

    incurredinforeigncountries.Further,socialsecuritycosts

    areincurredinforeigncountriesforemployeesworkingon-

    site,whichisasunkcostwithoutanybenefitaccruingtothe

    employees.Intheabsenceofaneffectiveforeigntaxcredit

    mechanismandTotalisationAgreements,thetaxcostfor

    IndianITindustryisinherentlyhigh.Intheabsenceoffiscal

    supportsuchassection10A/10B,theIndianITindustrywill

    sufferanETRhigherthanotherindustries(whichis

    estimatedtobearound20percent).

    TheIndianIT&ITeSindustrygenerateshugeemployment

    thatisdirectlyproportionaltothevolumeofbusiness.Fiscal

    incentiveshelpinsustaininggrowthandtherefore

    employment.Capitalintensiveindustriesgetfiscalincentive

    bywayofdepreciationforbuildingcapacityandalsolower

    thetaxcostsbyemployinganoptimaldebt:equitycapital

    structure.InthecaseofITandITeS,owingtothenatureofbusiness,useofdebtsforoperationshaslimitedscope.The

    capacityforIT/ITeSisbuiltthroughemploymentandthe

    incentiveisbywayofsection10A/10B.

    Whilethemaximummarginalrateforcompaniesis34

    percent,theaverageeffectivetaxrateis20percent,which

    meansthatallindustriesenjoytaxincentivesinoneformor

    theother.Section10A/10BdeductionforIT/ITeSislogical

    tomaintainparitywithotherindustriesconsideringthatit

    pre-dominantlycompetesinglobalmarkets.

    ThedividenddistributedbyCorporatesengagedinIT/ITeS

    asaproportionofnetprofitsissignificant,whichmeansa

    higherpay-outofdividenddistributiontax,whichisat17

    percent.Thisrateoftaxationondividendsisalmostequalto

    theETRofmostcorporatesat20percent.

    Thus,whileSection10A/10Bisseenasanincentive,allthe

    abovefactorsensurethattheaggregatetaxpaidbyIT/ITeS

    isonparwithmostcompaniesandwithdrawalwouldmean

    imposingahigherthanaveragetaxonIT/ITeScompanies.

    Issue: Iftheanswertotheaboveisano,doyoubelievethattheSEZschemeisaneffectivesubstitutefortheSTPI/

    EoUregime?

    Comments: SEZbenefitsarenotspecifictoIT/ITeS.SEZasaconceptisintendedtopromotecapitalformation,

    generateemploymentandpromoteexports.These

    objectivesaresignificantlyadvancedbyIT/ITeSsector.

    Issue: Whatimpactortrenddoyouexpecttoseeintheheadcountandcompensationlevelsofthesectorafterthe

    expiryoftheincome-taxholiday?

    Comments: Oncetaxincentivesarewithdrawn,businessesengagedinIT/ITeSwillgeneratelowerinternal

    resources.Obviously,itwillbeanimpedimenttogrowth,

    whichwillbefollowedbylowercompensationandalower

    generationofemployment.Inrelativeterms,thequantumof

    incomeinthehandsofemployeeswhichsufferstaxatthe

    maximummarginalrateof34percentwilldecline,which

    meansthatthetaxrevenuescollectedfromtheCorporates

    engagedinIT/ITeSwillbemorethanoffsetbyalower

    collectionfromtheemployeeswhoareengagedbythe

    IndianIT/ITeSindustry.

    Issue: Indiahasthusfar,beenapreferredoffshoredestination.Doyoubelievethatthiswillhaveanimpacton

    theattractivenessindexofIndia?

    Comments: TheattractivenessindexofIndiaforITeScoulddeclineastheskillsetsareusuallyfoundinother

    destinations,whichmayattractinvestmentsthroughfiscal

    incentives.IndianITservicesarecapableofmovingupthe

    valuechainandhenceIndiawillcontinuetobeapreferred

    destination.

    Issue: Ifso,doyoubelievethatanyadditionalinvestmentinthissectorwouldgotootherlocationssuchasVietnam,

    Romania,PhilippinesorEasternEurope?

    Comments: ITeSinvestmentcouldgotothesedestinations.

    Comments from some industry leaders

    Mr. Suresh C Senapaty,Executive Director andChief Financial Officer,Wipro Limited.

    8

    26

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    Issue: DoyoubelievethattheIndianIT/ITeSindustry

    needsfurtherfiscalsupportintheformofanextensionoftheincome-taxholidaybenefitsundersection10A/10Bof

    theIncome-taxAct?

    Comments: Yes.Theindustryisfacingmultipleheadwindsandneedsadditionaltaxsupport.

    Issue: Iftheanswertotheaboveisano,doyoubelievethattheSEZschemeisaneffectivesubstitutefor

    theSTPI/EoUregime?

    Comments: Ihaveansweredthepreviousquestionasyes.Inanycase,theSEZschemeisnotaneffective

    replacementtotheSTPIscheme.

    Issue: Whatimpactortrenddoyouexpecttoseeintheheadcountandcompensationlevelsofthesectorafterthe

    expiryoftheincome-taxholiday?

    Comments: Willleadtoaslowdowninrecruitmentandslowdownintheannualwageincreases.

    Issue: Indiahassolongbeenapreferredoffshore

    destination.Doyoubelievethatthiswillhaveanimpacton

    theattractivenessindexofIndia?

    Comments: Definitely.ITcompanieswillgrowtheirpresenceinothercountries.MNCswhoweresettingup

    shopinIndiawillalsolookatothercountriestoinvestin.

    Issue: Ifso,doyoubelievethatanyadditionalinvestmentinthissectorwouldgotootherlocationssuch

    asVietnam,Romania,PhilippinesorEasternEurope?

    Comments: Yes

    Mr. Rostow Ravanan,

    Chief Financial Officer,MindTree Limited.

    Issue: DoyoubelievethattheIndianIT/ITeSindustry

    needsfurtherfiscalsupportintheformofanextensionoftheincome-taxholidaybenefitsundersection10A/10Bofthe

    Income-taxAct?

    Comments: Yes

    Issue: Whatimpactortrenddoyouexpecttoseeintheheadcountandcompensationlevelsofthesectorafterthe

    expiryoftheincome-taxholiday?

    Comments: Althoughthesectorwillcontinuetogrowbutthegrowthratemaynotbeatthesamepaceashasbeen

    forlasttenyearsorso,henceitwillhaveconsequential

    impactontheheadcountandcompensationgrowth.

    Issue: Indiahassolongbeenapreferredoffshoredestination.Doyoubelievethatthiswillhaveanimpacton

    theattractivenessindexofIndia?

    Comments: TheattractivenessindexofIndiaisalreadyimpactedduetopoorinfrastructureandambiguoustaxlaws/

    govt.policies.Removalofthistaxholidaywilldefinitelyhavea

    furthernegativeimpact.

    Issue: Ifso,doyoubelievethatanyadditionalinvestment

    inthissectorwouldgotootherlocationssuchasVietnam,

    Romania,PhilippinesorEasternEurope?

    Comments: Yesthisprocesshasalreadystartedandescalatesasthesunsetontaxholidaycomes.

    Mr. Alok C. Misra,

    Group CFO,WNS Global Services.

    27

    8 Wipro Limited, MindTree Limited, and WNS Global Services are separate and distinct from KPMG

    International and its member firms. The views and opinions are those of the authors and do not nec-

    essarily represent the views and opinions of KPMG

    2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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    Data sources and references

    EconomistIntelligenceUnitwebsite

    Nasscom:StrategicReview2008

    EmergingDestinationsforIndianIT/ITeSIndustryIndia:KPMG

    NASSCOM

    NASSCOMwebsite

    STPIwebsite

    SEZwebsite

    IBEFwebsite

    WorldEconomicForumwebsite

    Wikipediawebsite

    InformationTechnologyAnnualReport2007-08,Ministryof

    Communications&InformationTechnology

    OtherPubliclyavailabledata

    28

    2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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    Glossary

    BFSI: Banking,FinancialServicesandInsurance

    BOP: BottomofPyramid

    BPO: BusinessProcessOutsourcing

    BRIC: Brazil,Russia,IndiaandChina

    CRISIL: CreditRatingInformationServicesofIndiaLimited

    CRM: CustomerRelationshipManagement

    EHTP: ElectronicHardwareTechnologyPark

    EIU: EconomistIntelligenceUnit

    EoU: ExportOrientedUnits

    EPZ: ExportProcessingZone

    FICCI: FederationofIndianChambersofCommerceandIndustry

    FY: FinancialYear

    GDP: GrossDomesticProduct

    IT: InformationTechnology

    ITeS: InformationTechnologyEnabledServices

    KPO: KnowledgeProcessingOutsourcing

    MAT: MinimumAlternativeTax

    M&A: MergersandAcquisitions

    MOP: MiddleofPyramid

    NASSCOM: NationalAssociationforSoftwareandServicesCompany

    R&D: ResearchandDevelopment

    SEZ: SpecialEconomicZone

    SOPs: SoftOperatingPolicies

    SME: SmallandMediumEnterprises

    STPI: SoftwareTechnologyParksofIndia

    TOP: TopofPyramid

    USD: UnitedStatesDollar

    29

    2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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    TheConfederationofIndianIndustry(CII)workstocreateandsustainan

    environmentconducivetothegrowthofindustryinIndia,partneringindustryand

    governmentalikethroughadvisoryandconsultativeprocesses.

    CIIisanon-government,not-for-profit,industryledandindustrymanaged

    organisation,playingaproactiveroleinIndiasdevelopmentprocess.Founded

    over112yearsago,itisIndiaspremierbusinessassociation,withadirect

    membershipofover7000organisationsfromtheprivateaswellaspublicsectors,

    includingSMEsandMNCs,andanindirectmembershipofover90,000companiesfromaround362nationalandregionalsectoralassociations.

    Afacilitator,CIIcatalyseschangebyworkingcloselywithgovernmentonpolicy

    issues,enhancingefficiency,competitivenessandexpandingbusiness

    opportunitiesforindustrythrougharangeofspecialisedservicesandglobal

    linkages.Italsoprovidesaplatformforsectoralconsensusbuildingand

    networking.Majoremphasisislaidonprojectingapositiveimageofbusiness,

    assistingindustrytoidentifyandexecutecorporatecitizenshipprogrammes.

    Partnershipswithover120NGOsacrossthecountrycarryforwardourinitiatives

    inintegratedandinclusivedevelopment,whichincludehealth,education,

    livelihood,diversitymanagement,skilldevelopmentandwater,tonameafew.

    Complementingthisvision,CII'stheme"India@75:TheEmergingAgenda",

    reflectsitsaspirationalroletofacilitatetheaccelerationinIndia'stransformation

    intoaneconomicallyvital,technologicallyinnovative,sociallyandethicallyvibrant

    globalleaderbyyear2022.

    With64officesinIndia,8overseasinAustralia,Austria,China,France,Japan,

    Singapore,UK,USAandinstitutionalpartnershipswith271counterpart

    organisationsin100countries,CIIservesasareferencepointforIndianindustry

    andtheinternationalbusinesscommunity.

    About Confederation of Indian Industry (CII)

    30

    2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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    KPMGistheglobalnetworkofprofessionalservicesfirmsofKPMGInternational.

    Ourmemberfirmsprovideaudit,taxandadvisoryservicesthroughindustry

    focused,talentedprofessionalswhodelivervalueforthebenefitoftheirclients

    andcommunities.Withnearly123,000peopleworldwide,KPMGmemberfirms

    provideservicesin145countries.

    ThememberfirmsofKPMGInternationalinIndiawereestablishedinSeptember

    1993.Asmembersofacohesivebusinessunit,theyrespondtoaclientservice

    environmentbyleveragingtheresourcesofaglobalnetworkoffirms,providingdetailedknowledgeoflocallaws,regulations,marketsandcompetition.We

    provideservicestoover2,000internationalandnationalclients,inIndia.KPMG

    hasofficesinIndiainMumbai,Delhi,Bangalore,Chennai,Hyderabad,Kolkata

    andPune.ThefirmsinIndiahaveaccesstomorethan2000Indianandexpatriate

    professionals,manyofwhomareinternationallytrained.Westrivetoprovide

    rapid,performance-based,industry-focusedandtechnology-enabledservices,

    whichreflectasharedknowledgeofglobalandlocalindustriesandourexperience

    oftheIndianbusinessenvironment.

    About KPMG in India

    31

    2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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    in.kpmg.com

    KPMGinIndia

    Mumbai

    KPMG House, Kamala Mills Compound

    448, Senapati Bapat Marg

    Lower Parel

    Mumbai 400 013

    Tel: +91 22 3989 6000

    Fax: +91 22 3983 6000

    Delhi

    4B, DLF Corporate Park

    DLF City, Phase III

    Gurgaon 122 002

    Tel: +91 124 307 4000

    Fax: +91 124 254 9101

    Pune

    703, Godrej Castlemaine

    Bund Garden

    Pune 411 001

    Tel: +91 20 3058 5764/65

    Fax: +91 20 3058 5775

    Bangalore

    Maruthi Info-Tech Centre

    11-12/1, Inner Ring Road

    Koramangala

    Bangalore 560 071

    Tel: +91 80 3980 6000

    Fax: +91 80 3980 6999

    Chennai

    No.10 Mahatma Gandhi Road

    Nungambakkam

    Chennai 600 034

    Tel: +91 44 3914 5000

    Fax: +91 44 3914 5999

    Hyderabad

    8-2-618/2

    Reliance Humsafar, 4th Floor

    Road No.11, Banjara Hills

    Hyderabad - 500 034

    Tel: +91 40 6630 5000

    Fax: +91 40 6630 5299

    Kolkata

    Park Plaza, Block F, Floor 6

    71 Park Street

    Kolkata 700 016

    Tel: +91 33 2217 2858

    Fax: +91 33 2217 2868

    KPMGContact

    Uday Ved

    Head - Tax

    Tel: +91 (22) 3983 5933e-Mail: [email protected]

    Pradip Kanakia

    Executive Director

    Head - Markets

    e-Mail: [email protected]

    Tel: +91 80 3980 6100

    CIIContact

    Confederation of Indian IndustryNo.1086, 12th Main, HAL 2nd Stage

    Indiranagar, Bangalore 560 008

    Tel: 80-2527 6544 (8 lines)

    Fax: 91-80-2527 6709

    Website: www.cii.in


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