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Indian IT Inc to touch $100bn in 2012: V Balakrishnan, CFO, Infosys
March, 15th 2012

The Indian IT services industry is expected to reach $100 billion in revenues this year, with exports contributing to about $69 billion. The industry impacts India's GDP by around 7.5% and employs close to 2.8 million employees, with an additional 2,30,000 employees expected to be added in fiscal 2012.

The indirect employment created in the economy could be four to five times that of the direct employment generated. Taken together, the IT services industry in India is one of the biggest employment creators in the country and has put the country on the global map.

A large part of the credit for the phenomenal growth of this industry goes to the support provided by the liberal tax policies provided for the industry by the government over the years.

Such policies allowed the industry to reinvest, to reinvent itself and helped companies achieve global scale. Over the years, the industry has matured and expanded its footprint into high value-added services such as consulting, products, intellectual property and so on. Today, the Indian IT services industry has the ability to compete head on with the best in the world.

However, of late, we have seen tax authorities in India taking an aggressive positionon certain tax benefits being given to the industry that give rise to a few issues that require urgent clarity from the government.

The first one relates to the taxation of profits earned from onsite activities or work done at client locations outside India. Explanation 3 of section 10A and explanation 2 of section 10AA clearly state that onsite activities are deemed to be considered as exports from India and warrant relevant exemptions. However, the tax authorities deny these exemptions as they do not consider these onsite activities as exports. This is nothing but denying an exemption that is explicitly provided under the law.

The second issue relates to the tax exemptions available for exports under the SEZ scheme. Indian software companies enter into an umbrella contract, Master Service Agreement (MSA), with customers that specify general conditions, the legal framework and so on, for their overall agreement.

On the basis of the MSA, customers then issue individual Statement of Work (SoW) or purchase orders for projects to be executed. The SoW clearly defines the scope of work and the price for each deliverable and helps define which of the activities are eligible for tax exemption.

The ministry of commerce, the nodal ministry to implement the SEZ scheme in India, issued instruction no. 70 on November 9, 2010, to allow for this tax exemption.

However, the income-tax department is unwilling to accept the diktat of the circular, expecting IT companies to make huge payments towards unjustified taxes. This clearly shows that two arms of the government are takinga totally different view on the same subject.

The third issue relates to therefund of service tax paid by the industry. More than 2,000-3,000 crore worth of service tax refunds for the IT industry are held up at various appellate forums. This is impacting the working capital flows for most companies in the industry, increasing uncertainty and ambiguity.

In India, tax disputes extend over long periods of time. The whole process of settling a tax dispute takes around 8-10 years due to multiple forums for appeal to conclude any tax dispute.

The recently-formed Dispute Resolution Panel ( DRP) has not helped much in accelerating the conclusion of tax disputes. It is imperative that we find a mechanism to conclude tax disputes faster so that there is greater certainty for corporates.

Today, global markets are throwing up several challenges for the Indian IT services industry. Nasscom, the industry body, has warned of slower growth for next year. This will have a huge impact on the overall economy and employment creation in the country.

The industry is not expecting benefits in the form of tax holidays and has come to terms with the existing tax regime. However, the industry needs greater certainty and clarity in the application of existing tax laws. When the need for the industry is to focus on external markets to address global challenges, these tax uncertainties at home are a big distraction.

The focus for any country should be to bring in greater clarity and certainty of both tax laws and the application of the law to foster growth for the economy.

At the end of the day, the IT services industry is the goose that lays golden eggs. Please don't kill the goose for the golden egg.

It is imperative to add a few points on this author's pet topic of how the government can leverage IT for improving the daily existence of millions of Indians. I believe that a focused approach on use of IT for improving governance and citizens' experience is imperative for India.

First, the adoption of IT within government departments is very low. Additionally, different governmental agencies are doing things in silos with very little coordination among themselves.

It's almost like the right hand doesn't know what the left hand is doing. The use of IT will not only deliver better citizen experience in the country but also increase transparency, reduce corruption and increase efficiency in the country.

There is a need for a dedicated IT minister who should be like the CTO for the country. This will accelerate IT adoption, bring in efficiency in IT spending by the government and drive standardisation across different arms of the government.

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