It seems an innate desire among our policymakers to pull down or ruin anything that is going well. Of late, the information technology sector (IT) is in a state of flux following a series of initiatives announced by the government and an equally disturbing set of intentions; both of which if they see the light of day will return the IT sector to the pre-liberalisation days.
Consider the recent announcement by the government on giving preference to domestically manufactured electronic goods in procurement by all government departments. Announced with the aim of reducing imports and promoting indigenous production, it is very likely that such selective procurement will, in fact, have the opposite effect. Also, it may herald the return of the days of importing CKD/SKD kits, and adding an inflated value-add before selling it in the open market.
This strategy comes with a heavy price for the consumer. It also opens up the doors for repackaging of outdated technology. Remember, the Indian electronics hardware production industry constitutes less than 1.5% of global production. Also, components are manufactured by different companies having efficiencies of scale in different regions of the world while formal assembly may take place elsewhere.
Of late, Indian consumers have been able to enjoy the benefits on being at par with the world when it comes to availability of new technologies and services. If preferred manufacturing becomes the norm, the time lag will reverse and widen. This will over time have a negative effect on software development as well. Regulatory distortions are once again being used to create monopolies or duopolies.
Also, the term software product generally refers to a traded, standard software programme that instructs a computer to carry out specific tasks. And, it is a product in which companies are very protective about their IPRs and copyrights, something the Indian IT industry lacks, especially when it comes to manufacturing such products.
So, in these days of having industries of world class standards, how does the government expect Indian manufacturers to suddenly acquire the necessary expertise and economies of scale? Imports constituted almost 46% of India’s electronics industry in 2011. It must also be remembered that the global electronics industry is one of the fastest growing and demand in the Indian market is expected to touch $400 billion by 2020. Do we want to cash in on the opportunity or fritter it away?
Another specious argument put forward by our policy makers is that software R&D is equivalent to a manufactured good and therefore companies must pay tax on global sales. This raises the spectre of cross-country taxation and relooking at dual taxation avoidance treaties. Meanwhile, companies are forced to lock in capital that can be better utilised elsewhere.
What the policy-maker appears to have forgotten when it comes to the Indian IT sector is that its strengths lie in customised application software and not generic packaged software. Today, the gap between policy-makers and industry is taking a toll on the IT industry. There are interpretations galore on whether providing onsite services are taxable or not, the issue of transfer pricing and whether software is a good or a service, and does one pay royalty or not?
Again, though domestic manufacturing is expected to benefit from the increasing number of foreign companies setting up their R&D back offices and centres in the country, there is concern over the taxation norms that such companies attract. In what was supposedly to be a tax-free area of activity, units in software exporting zones are now being subject to a Minimum Alternative Tax (MAT). More importantly, there is a divergence in the government itself.
While the Industry Ministry wants to encourage IT companies, the Finance Ministry is seeking to mop up more revenue by restricting deductions claimed under Section 10A of the Income Tax Act, which relates to tax exemptions for software export income by units registered with the Software Technology Parks of India. If this situation continues, the flight of global R&D is imminent from India.
While India has the necessary expertise in application development, linking it to hardware products for the masses is a road we are yet to walk on. The answer for the government probably lies in the Israeli model. Israel is a leading player in the global IT industry simply because of its focus on software related to product development and not just on application development.
It is this linkage that has seen companies like Microsoft open their biggest R&D centres in that country. The key is to ‘productise’ software. Let us explore forward looking policies rather than returning to the lexicon of the 1980s.