Over the past decade, the India’s Information Technology (IT) sector has become a growth engine for the economy with rising contribution to GDP, tax revenues, employment and value creation. However, for the Indian economy to realize the full potential of the value generated by the Indian IT industry, it is imperative to curb revenue losses to the Government exchequer from the high rates of software piracy in India, especially in companies and organizations.
Businesses, who are otherwise legitimate, use software on a large scale but they evade paying tax when they are not buying licensed software, thus causing huge loss to the state exchequer and disruption of the domestic software eco-system. This was stated in an IDC whitepaper, “Software Piracy in India: Costing Millions to State Exchequer in Tax Losses”, sponsored by Business Software Alliance (BSA), today.
The paper found that in 2010, IT companies paid nearly US$3.04 billion to state exchequer in tax. By 2014, the tax receipt is expected to grow to US$5.7 billion with IT spending expected to grow at a CAGR of 15% until 2014. Despite the growth, substantial value in form of potential revenues is lost due to software piracy. With a software piracy rate of 65% in 2009 (more than six out of ten PC software programs installed in 2009 were not paid for), the study finds that only one-third of the overall PC software revenues are captured by the industry incumbents and the rest are lost to software piracy. Consequently, in 2009, the state exchequer tax receipts loss was approximately US$866 million in net taxes, both indirect and direct.
According to IDC estimates in the study in 2009, 65% software piracy of packaged software caused:
Loss of commercial value of unlicensed software totaled over US$2.27 billion causing the domestic economy to lose US$5.3 bn of software, services and channels revenues to software piracy.
Consequently, the state exchequer tax receipts loss was roughly US$866 million at the current piracy and employment levels, as the industry lost its otherwise legitimate share of revenues to pirates.
The indirect tax receipts would have contributed US$553 million from software (media and paper licenses) and services-related business transactions and direct tax receipts would be around US$313 million for the Indian economy.
Keshav S Dhakad, Chair – BSA India Committee said, “While the IT industry has consistently ensured the Indian economy maintain a high growth trajectory, it remains vulnerable to high rates of piracy in India resulting in lot of value erosion across various fronts. This in turn affects the entire value chain from distributors to traders to resellers and hampers job creation in the areas of sales, marketing, distribution, installation, maintenance, development, customization, consultancy, training, education, which are heavily dependent upon robust and protected software eco-system. High incidents of tax losses to the Government due to software piracy hinder revenue generation for the State and there is an urgent need to facilitate the creation of a strong intellectual property compliance and accounting governance model in companies to account for usage of genuine and licensed software as part of their internal and external audits.”
The rising usage of computers and Internet in India year-on-year, and ICT taking center stage in being a business enabler plus a driver of innovation and governance, it is important for the Indian governmet to curb software piracy levels in order to harness the full potential of the IT industry.
The study also found that reducing software piracy will stimulate spending throughout the IT value chain. Because of software’s unique role as a revenue generator for local service and distribution companies, three-quarters of the benefits generated by reducing software piracy are enjoyed by the domestic economy. For example, if PC software piracy is curtailed by 5% in 2011, IDC estimated that the incremental potential industry revenues or the GDP contributions will be US$790 million, tax revenue of US$95 million and 26,108 new high-skilled jobs will be created. Front-loading the benefits by reducing software piracy by 10 points in the first two years compounds the economic benefits by 31%.
“These findings make clear that there is a direct correlation between reduction of software theft and economic benefits to the Government and the domestic economy. The millions of dollars being lost in taxes to the State due to software piracy if checked, could lead to re-investment in critical developmental projects for the country, a necessity for high growth economy like India. The need of the hour is put in place some strong regulatory mechanisms to prevent software theft leading to these tax losses”, said Lizum Mishra, Director, BSA India.
In some countries usage of unlicensed & pirated software in companies has already been declared as a form of “tax evasion”.
Speaking on behalf of IDC, Harish Taori, Custom Research, Consulting & Advisory IDC Asia/Pacific said, “Software piracy is a unique crime as most of illegal and unlicensed usage of software occurs in otherwise legal and legitimate businesses, depriving government of legitimate taxes from software sales and distribution. The paper comprehensively mapped entire Indian IT software value chain to estimate tax revenue losses due to software piracy and likely benefits that economy and government can garner by reducing software piracy in the country. It is important to create the institutional framework to check levels of piracy and also to bring about attitudinal changes necessary in legitimate business environments to regulate such incidents.”
To curb the levels of piracy IDC and BSA propose that:
Indian tax laws to be amended laws to classify software piracy as a form of tax evasion and define corresponding tax violation rules on the lines of international best practices
The regulatory bodies in collaboration with government agencies need to enhance the legislative environment to classify software as a form of tax evasion, in line with the international best practices and in accordance with WIPO treaty for IP protection.
Empower government tax inspectors, external and internal auditors to check and account for genuine software licenses inside organizations, whether public or private limited
Mandate management officials of enterprises and companies to account for and declare genuine software licenses in their books of accounts and financial statements
Spread awareness around legal, financial and security threats from software piracy and the value of genuine licenses inside organizations and related tax implications.The objective is to get a critical mass of people to use legal software and then let the bandwagon effect reach new self-sustaining equilibrium, where the use of legal IP products becomes a societal norm.
While Government of India, industry bodies and software companies continue to take initiatives to curb piracy and educate end-users, challenges at various fronts still remain including that of a robust national IPR enforcement ecosystem, creation of dedicated IPR adjudication judicial system and continued capacity building of all stakeholders including Government decision makers, judiciary, public prosecution department, law enforcement agencies, Corporate CIOs, CFOs, channel partners, and end-users.
Source:http://www.indiainfoline.com/Markets/News/Software-Piracy-caused-tax-loss-of-US-dollar-866mn-to-govt-of-India-in-2009-IDC/5167225448
