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Tuesday, June 27, 2006

Indian SEZ, Tax Breaks & IT & ITES Industry

Basab Pradhan wonders,why the tax holiday should be extended for the IT services companies operating in India. He points out that companies like Infosys make 25% net margins after taxes. At $20B in revenues, the industry is no longer a small industry needing encouragement. So why does the IT industry not pay corporate income tax? Not just that, under the SEZ act, that tax holiday will now be extended, indefinitely. The details of the SEZ facilities make an interesting reading. Basab questions the need for such provisions given that India today has a large and still rapidly growing IT and BPO industry entirely focused on offshore services to developed markets. Most of the larger firms are very profitable and in a scenario where the custom duties are way down & telecom bandwidth is dirt cheap, probably this is anachronastic.
My take: Very valid questions – I guess SEZ provisions are not just for the software industry alone -most of the terms covers all industries – this time around it should be seen as aiding SEZ growth and not necessarily to be seen as a concession to the services industry. In fact there's a view that Indian SEZ's may not give the needed boost.If we take that perspective and given the fact that the country’s trade numbers are such a miniscule % of global trade, it has to be welcomed. I have another issue – some do not think that Indian IT service providers have conquered the world – still a long long distance to grow to be in the top 5 of the global list. The focus has got to shift. I was trying to browse Nasscom site to look for some relevant info on the tax breaks and stumbled upon this note. The offshore players themselves need to make innovation a priority – given the perception that companies are not seen as innovation chasing entities. In fact Nasscom’s innovation award finalists last year happened to be all small sized enterprises. The format has changed for this year– no complaints though.
The innovation technology framework makes interesting reading – with Nasscom announcing the set up of innovation awards, the stage is well set – but in reality there’s a long road ahead. The setting up of innovation awards and the criteria set out for these are indeed interesting:
- Original IP Creation
- Install base for Products
- Revenue from IP
- Potential of the IP
The emerging challenges related to the industry coming from intensified competition from even lower-cost offshore outsourcing destinations and given the tight talent supply situation in proportion to the demand, means corporates need to take a more imaginative and radical approach to be more innovative and roll things faster. unconventional form. Companies will have to explore new avenues that will give them a definitive leg up over global competition. As I wrote earlier in a different context, when we shall be getting to see something like a J.D.Power rating for the IT consulting majors service offerings – high time for it. So the margins, (which are already under pressure for some), would be better served in terms of funneling towards growth in these pursuits – mere capex on buildings, landscape alone won’t clearly help. Having said these, am also aware of the various initiatives pursued by Tier 1 offshore companies on such initiatives – the issue is more and more of that need to happen.

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