Investment Opportunities in India

IT &ITeS Sector

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INFORMATION TECHNOLOGY

Sector Overview

India is regarded as the premier destination for global IT and ITeS outsourcing, accounting

for almost 55% of the global sourcing market in 2010, according to the Ministry of

Communications and Information Technology. The ITeS sector includes IT hardware,

software and services. The Indian IT-BPO sector is estimated to have aggregated revenues of

USD 88.1 billion in 2010–2011, with the IT software and services sector (excluding

hardware) accounting for USD 76.2 billion of revenues. During this period, direct

employment is expected to have reached nearly 2.5 million, an addition of 240,000

employees, while indirect job creation is estimated at 8.3 million. As a proportion of national

GDP, the sector revenues have grown from 1.2% in 1997–1998 to an estimated 6.4% in

2010–2011. Its share of total Indian exports (merchandise plus services) has increased from

less than 4% in 1997–1998 to 26% in 2010–2011, as per the report of the working group on

the IT sector for the 12th Five-Year Plan (2012–17).

The main growth drivers of the IT and ITeS industry are cost efficiencies, utilization rates,

diversification into new verticals, and shifting business and pricing models. India is a

preferred destination for companies that are seeking to offshore IT and back-office functions.

It also retains its low-cost advantage and is a financially attractive location when viewed in

combination with the business environment it offers and the availability of skilled people.

The country is also known across the world for its successful export-led software industry.

Software and services exports (including ITeS-BPO), excluding hardware exports, were

estimated at USD 59 billion in 2010–11, as per NASSCOM, India’s premier association in

the IT sector. Software and services exports constituted more than half of the electronics and

IT-ITeS industry’s revenues in 2010–11.

As per the report of the task force set up by Ministry of Communications and Information

Technology (MoC&IT), the demand for electronics hardware in the country is projected to

increase from the USD 45 billion in 2009 to USD 400 billion by 2020. The task force has

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been set up to suggest measures to stimulate the growth of the IT-ITeS and the electronics

hardware manufacturing industry in India.

According to the executive summary report published by the Department of Electronics and

Information Technology, MoC&IT, the sector has grown to become the biggest employment

generator in the country; direct employment within the IT-BPO sector was expected to be 2.5

million and indirect employment was estimated to be about 8.3 million in 2010–11. As per

NASSCOM estimates, the workforce in the Indian IT sector will touch 30 million by 2020.

Between April 2000 and March 2011, the computer software and hardware sector received

cumulative foreign direct investment (FDI) of USD 10,723 million, according to the

Department of Industrial Policy and Promotion (DIPP), which is part of the Ministry of

Commerce and Industry and which is responsible for formulating the country’s FDI policy.

Policy and Promotion

IT and ITeS has played a major role in the overall growth and development of India. In the

electronics and IT sector, 100% FDI is permitted under the automatic route. The major fiscal

incentives provided by the Government of India in this sector have been for export-oriented

units (EOU), software technology parks (STP) and special economic zones (SEZ). These are

detailed below:

Software Technology Parks (STPs) were set up as autonomous societies under the

Department of Electronics and Information Technology in 1991 to promote software

exports from the country. There are about 51 STP centers that have been set up since

the start of the programme. STPs enjoy a number of benefits that include exemptions

from service tax, excise duty and rebate for payment of Central sales tax. The most

important incentive available is 100% exemption from income tax of export profits;

the STPs have been instrumental in boosting India’s IT and ITeS exports.

As per MoC&IT, exports by STP units crossed Rs. 2,044.40 billion in 2010–11. The

state with the largest export contribution was Karnataka followed by Maharashtra,

Andhra Pradesh and Tamil Nadu. STPs have a pan-India presence, including in the

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cities of Bangalore, Bhubaneswar, Chennai, Coimbatore, Hyderabad, Gurgaon, Pune,

Guwahati, Noida, Mumbai, Kochi, Kolkata, Kanpur, Lucknow, Dehradun, Patna,

Rourkela, Ranchi, Gandhinagar, Imphal, Shillong and Nashik, among others.

The Special Economic Zones (SEZ) scheme was enacted by the Government of

India in 2005 with an objective of providing an internationally competitive and

hassle-free environment for exports. It provides drastic simplification of procedures

and a single-window clearance policy on matters relating to Central and state

governments. Under the scheme, the exemption from income tax is tapered down over

15 years from the date of commencement of manufacture. There is 100% exemption

of export profits from income tax for the first five years, 50% for the next five years

and 50% for next five years subject to transfer of profits to special reserves.

According to the SEZ Approval Board of India, the maximum number of SEZs has

been approved for the IT-ITeS sector. Overall for the IT, ITeS, electronic hardware

and semiconductor sectors, the government has given formal approval to 354 SEZs

and the number of notified SEZs in these sectors was 236 until 2010.

Information Technology Investment Regions (ITIRs) were notified in 2008 in

order to address the sector’s infrastructure needs. As per plans, these regions will be

endowed with excellent infrastructure that will allow companies to reap the benefits

of co-siting, networking and greater efficiency through use of common infrastructure

and support services.

R&D promotion is also being encouraged by the government; major highlights

include promoting start-ups that are focused on technology and innovation, and a

weighted deduction of 150% of expenditure incurred on in-house R&D under the

Income Tax Act. In addition to the existing scheme for funding R&D projects, the

Department has put in place the two key schemes — Support International Patent

Protection in Electronics & IT (SIP-EIT) and Multiplier Grants Scheme (MGS).

The Cabinet has approved the proposal to provide a special incentive package to promote

large-scale manufacturing in the electronic system design and manufacturing (ESDM) sector

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which is called the Modified Special Incentive Package Scheme (M-SIPS). The main features

of M-SIPS are as follows:

The scheme provides subsidy for investments in capital expenditure — 20% for

investments in SEZs and 25% in non-SEZs. It also provides for reimbursement of

CVD/excise for capital equipment for non-SEZ units. For high technology and high

capital investment units, such as fabs, reimbursement of Central taxes and duties is

also provided.

The incentives are available for investments made in a project within a period of 10

years from the date of approval.

The incentives are available for 29 category of ESDM products including telecom, IT

hardware, consumer electronics, medical electronics, automotive electronics, solar

photovoltaic, LEDs, LCDs, strategic electronics, avionics, industrial electronics,

nano-electronics, semiconductor chips and chip components, other electronic

components and EMS. Units across the value chain starting from raw materials,

including assembly, testing and packaging, and accessories of these categories of

products are included. The scheme also provides incentives for relocation of units

from abroad.

The scheme is open for three years from notification.

Over and above these, the government has been taking steps to bring down the total taxation

level on electronics hardware. The general rate of excise duty (CENVAT) has been reduced

to 8% and Central Sales Tax (CST) has been reduced from 3% to 2%. VAT on IT products is

at 4%, as per MoC&IT. Further, under the Technical Advisory Group for Unique Projects

(TAGUP), the government is developing IT infrastructure in five key areas, including:

New Pension System (NPS)

Goods and Services Tax (GST)

Setting up the National Taskforce on Information Technology and Software

Development with the objective of framing a long-term national IT policy for the

country

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Enactment of the Information Technology Act, which provides a legal framework to

facilitate electronic commerce and electronic transactions

Setting up of more than 50 STPs for the promotion of software exports

According to the ministry, the salient features of the existing Foreign Trade Policy applicable

to the electronics hardware industry are:

Import of capital goods at 3% customs duty, subject to an export obligation equivalent

to eight times of duty saved on capital goods imported under the EPCG scheme, to be

fulfilled in eight years reckoned from authorization issue-date. However, a 0% duty

EPCG scheme allows import of capital goods at 0% customs duty, subject to an

export obligation equivalent to six times of duty saved on capital goods imported

under EPCG scheme, to be fulfilled in six years reckoned from authorization issue

date.

SEZs are being set up to enable hassle-free manufacturing for export purposes. Sales

from domestic tariff areas (DTA) to SEZs are being treated as physical exports. This

entitles domestic suppliers to drawback/DEPB benefits, CST exemption and service

tax exemption. 100% income tax exemption on export profits is available to SEZ units

for five years, 50% for next five years and 50% of ploughed back profits for five

years thereafter.

Major Players

Global companies such as Accenture, HP Enterprise Services, IBM and Capgemini have a

strong presence in India. These companies already have a large number of India-based

employees — Accenture (40,000+), IBM (130,000+), HP Enterprise Services (15,000+) and

Cap Gemini (26,000+); global players are aiming to develop onshore service providers who

can deliver seamless hybrid onshore-offshore services at low costs.

Some of the top IT firms in India are TCS, Tech Mahindra Limited, Infosys Technologies

Limited, Patni Computer Systems Limited, Wipro Technologies Limited, Oracle Financial (I-

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Flex Solutions Ltd), Mahindra Satyam Computer Services Limited, Mphasis, HCL

Technologies Limited and Larsen & Toubro Infotech Limited.

Indian IT companies have, in recent years, started expanding their global footprint through

the global delivery model to seamlessly service their clients’ needs worldwide. Industry

analysts expect the top IT firms to grow between 23% and 27% in 2012 on the basis of an

increased number of discretionary projects, improved pricing and robust business volumes.

Sector Outlook

The Indian information technology sector continues to be one of the sunshine sectors of the

Indian economy. According to NASSCOM, the Indian IT industry is poised to become a

USD 225 billion industry by 2020.

According to a McKinsey report titled ‘Perspective 2020: Transform Business, Transform

India,’ the exports component of the Indian IT industry is expected to reach USD 175 billion

in revenue by 2020. Over 80% growth is expected from non-traditional sectors such as public

sector, media and utilities; in addition, strong demand is expected from emerging countries

that currently account for only 20% of global IT spending. At the same time, the domestic

component will contribute USD 50 billion in revenue by 2020 as India is considered to be the

global hub as far as the availability of skilled talent is considered. Moreover, the growing

talent pool of India has the ability to drive the R&D and innovation business in the IT-BPO

space.

Market size

The growth in the Indian IT industry is expected to be around 30 per cent and the overall

sales are projected to touch US$ 17 billion in FY 15, according to Manufacturers' Association

of Information Technology (MAIT).

The Indian IT infrastructure market - comprising server, storage and networking equipment -

is expected to grow by four per cent in 2014 to touch US$ 1.9 billion, according to Gartner.

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The IT services market in India is expected to grow at the rate of 8.4 per cent in 2014 to Rs

476,356 million (US$ 7.88 billion), according to International Data Corporation (IDC).

Indian insurance companies plan to spend Rs 117 billion (US$ 1.93 billion) on IT products

and services in 2014, a 5 per cent increase from 2013, as per Gartner.

Indian enterprises are enhancing their IT security operations capabilities across departments.

The Indian market for security infrastructure and services is expected to grow from US$ 989

million this year to US$ 1.4 billion by 2017, as per Gartner.

Investment

Indian IT's core competencies and strengths have placed it on the international canvas,

attracting investments from major countries.

According to data released by the Department of Industrial Policy and Promotion (DIPP), the

computer software and hardware sector attracted foreign direct investment (FDI) worth Rs

60,503.21 crore (US$ 10.01 billion) between April 2000 and June 2014.

Some of the major investments in the Indian IT and ITeS sector are as follows:

Tata Communications plans to invest more than US$ 200 million to double its data

centre capacity in India to 1,000,000 square feet over three years.

Wipro has bagged a US$ 1.2 billion outsourcing deal from Canadian utilities major

ATCO. As part of the deal, Wipro will take over the IT subsidiary of ATCO, ATCO

I-Tek, in an all-cash deal worth US$ 195 million.

L&T Technology Services has bought 74 per cent equity stake in Thales Software

India Pvt Ltd, to strengthen its avionics business. This collaboration will enhance

L&T's expertise in high-end avionics software.

The Technopark-Technology Business Incubator plans to set up 'OpeniSpace', an

open innovation space on its campus, for innovators and young student entrepreneurs.

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The 'OpeniSpace' start-up space will provide plug-and-play facilities with 4 to 12

seats along with Wi-Fi internet connectivity for young entrepreneurs.

Mphasis has announced the launch of an e-Surveillance and Power Efficiency

Solution 'ProTecht', in partnership with Delta Power Solutions. The partnership will

enable Mphasis Payment Managed Services (MPMS), to offer the most

comprehensive single window solution for ATM security and power efficiency

innovation across the ATM industry.

Apax Partners has bought a 1.5 per cent stake worth Rs 57.84 crore (US$ 9.56

million) in software products and services provider Persistent Systems in a public

market transaction.

Government Initiatives

The Government of India played a key role with public funding of a large, well-trained pool

of engineers and management personnel who could forge the Indian IT industry.

The Central Government and the respective state governments are expected to collectively

spend US$ 6.4 billion on IT products and services in 2014, an increase of 4.3 per cent over

2013, according to a study by Gartner.

Some of the major initiatives taken by the government to promote IT and ITeS sector in India

are as follows:

The Government of India plans to reduce the requirement of the built up area from

50,000 square metres to 20,000 square metres and capital conditions for FDI from

US$ 10 million to US$ 5 million for development of smart cities. It has allocated a

sum of Rs 7,060 crore (US$ 1.16 billion) in the current fiscal for the project of

developing 'one hundred Smart Cities'. The Government of India also plans to launch

a pan India programme 'Digital India' with an outlay of Rs 500 crore (US$ 82.71

million).

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The government has pledged to support the growth of domestic information

technology capabilities in both hardware and software focused on enabling the timely

delivery of citizen services and creating new jobs opportunities, especially in rural

areas.

India plans to set up industrial parks in the pharmaceutical and information

technology (IT) sectors in China to strengthen India-China trade and investment ties.

The Government of India will develop new manufacturing clusters for electronic

goods in eight cities as part of its agenda to boost manufacturing, according to Mr

Ravi Shankar Prasad, Union Minister for Communications and Information

Technology, Government of India.

More than 20 small and medium enterprises (SMEs) in the IT sector have recently

received land allotment letters from the Government of Punjab to set up their units

with an investment of Rs 500 crore (US$ 82.71 million).

Road Ahead

Globalisation has had a profound impact in shaping the Indian IT industry with India

capturing a sizeable chunk of the global market for technology sourcing and business

services. Over the years, the growth drivers for this sector have been the verticals of

manufacturing, telecommunication, insurance, banking, finance and, of late, the fledgling

retail revolution. As the new scenario unfolds, it is getting clear that the future growth of IT

and ITeS will be fuelled by the verticals of climate change, mobile applications, healthcare,

energy efficiency and sustainable energy. Traditional business strongholds will make way for

new geographies, there would be new customers and more and more of SMEs will go for IT

application and services.

Demand from emerging countries is expected to show strong growth going forward. Tax

holidays are today extended to the IT sector for STPI and SEZs. Further, the country is

providing procedural ease and single window clearance for setting up facilities.

Exchange Rate Used: INR 1 = US$ 0.0165 as on August 26, 2014

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Automatic Approval

FDI upto 100% is allowed under the automatic route from foreign/NRI investor without prior

approval in most of the sectors including the services sector. FDI in sectors/activities under

automatic route does not require any prior approval either by the Government or RBI (For

details please refer to RBI website athttp://www.rbi.org.in (External website that opens in a

new window)). In pursuance of Government commitment to further liberalise the FDI regime,

all items/activities have been placed under the automatic route for FDI/NRI and OCB

investment, except the following:

All proposals that require an Industrial Licence, which includes

The item requiring an Industrial Licence under the Industries (Development &

Regulation) Act, 1951;

Foreign investment being more than 24% in the equity capital of units manufacturing

items reserved for small scale industries; and

All items which require an industrial licence in terms of the locational policy notified

by Government under the New Industrial Policy of 1991.

All proposals in which the foreign collaborator has a previous venture/tie up in India.

All proposals relating to acquisition of shares in an existing Indian company in favour

of a foreign/NRI/OCB investor.

All proposals falling outside notified sectoral policy/caps or under sector in which

FDI is not permitted and/or whenever any investor chooses to make an application to

the FIPB and not to avail of the automatic route.

All proposals for investment in public sector unit, as also for EOU/EPZ/EHTP/STP units

would qualify for automatic route subject to the above parameters. The modalities and

procedures for automatic route would remain the same and RBI would continue to be the

concerned agency for monitoring/reporting as per exiting procedure. FDI/NRI/OCB

investment under the automatic route shall continue to be governed by the notified sectoral

policy and equity caps.

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Procedure for Obtaining Government Approval - FIPB

All proposals for foreign investment requiring Government approval are considered by the

Foreign Investment Promotion Board (FIPB). The FIPB also grants composite approvals

involving foreign investment/foreign technical collaboration. For seeking the approval for

FDI other than NRI investments and 100% Export Oriented Units (EOUs), applications in

form FC-IL should be submitted to the Department of Economic Affairs (DEA), Ministry of

Finance. For details on the Foreign Direct Investment Policy guidelines, please refer to

website - http://dipp.gov.in 1

Contact Persons:

Mrs Sushila Ram Varma

Chief Legal Consultant

Ph: +91 98111 91142, +91 99492 78548

Email - sushilaram@theindianlawyer.in , contact@theindianlawyer.in,

sushilaram@gmail.com

1 Sources :

http://business.gov.in/investment_incentives/index.php

http://techcircle.vccircle.com/2013/05/22/mapping-south-indias-top-sectors-register-now/

http://www.investindia.gov.in/biotechnology-sector/

http://investkarnataka.gov.in/

http://www.investingintamilnadu.com/tamilnadu/opportunities/opportunities.php

http://www.apinvest.co.in/

http://business.gov.in/investment_incentives/investment_opp_ap.php

http://www.investindia.com

http://www.makeinindia.com

http://deity.gov.in/content/foreign-investment-policy

http://www.oifc.in/business-connect/investment-opportunities

http://www.mp.gov.in/documents/10192/1298301/Final%20IT%20Investment%20Policy%202014%20-%2007%2010%2014.pdf

http://www.advantagekarnataka.com/investment-sector/it.php#.VH7I0_l5U-w

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Mogli S.V

Business Consultant

Ph: +91 78933 37474

Email – msv@theindianlawyer.in