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Expectations of IT sector from Budget 2016-17

Goutam Das     February 25, 2016

It isn't anything short of saying, "In your face, mister."

On January 12 this year, the United States Citizenship and Immigration Services (USCIS) said that a new law, The Consolidated Appropriations Act, 2016, will increase H-1B and L-1 petition fees. H-1B and L-1 visas are widely used by the Indian IT services exporters to service customers in the United States. The petitioners must now submit an additional fee of $4,000 for certain H-1B petitions and $4,500 for certain L-1A and L-1B petitions. And in the U.K., a Migration Advisory Committee (MAC), an expert panel of government advisers, recommended higher salary thresholds for skilled immigrants and those on intra-company transfers.  

Success appears to have created its own problems for the Indian IT industry, that has combined revenues of nearly $150 billion. Well publicized layoffs at American corporations such as Disney in 2015, where its tech staffers were replaced by the employees of Indian outsourcing companies, did not help.

Indian IT is now being targeted. And while protectionist rhetoric is a given in any election year in the U.S., this time, it is for real.

"Enough value has not been given to the jobs that have being created (in the U.S.) by the Indian IT industry or the amount which the professionals from Indian IT pay to both the federal and state governments as taxes and inputs," Krishnakumar Natarajan, CEO of IT firm Mindtree, says. "That is taken for granted and new ways to milk  the golden goose is being found, which reflects of protectionism."

This sort of protectionism, the IT industry feels, have to be offset by support from the Indian government. That ask has many flavours.

Indian IT, thus far, has largely grown and flourished will little government support. It would still continue growing without the government's help - albeit with much less profitability if its cost competitiveness is lost. However, K.K. Raman, a Partner at advisory firm KPMG, says at one level, the government can and must help with negotiation - India must continue to engage in bilateral and multilateral dialogues with countries resorting to protectionism. Domestic incentivization policies require a re-look as well. In difficult times - a market slowdown is expected in the second half of the year - improvements in productivity can go a long way. And according to industry watchers, that re-look can begin with special economic zones (SEZs).

The Indian government has proposed a roadmap for reducing corporate tax to 25 per cent from 30 per cent over the next four years. Tax exemptions will therefore see a "sunset", probably by 2017.  But even for units that are already functional, there are constrains. "In a new SEZ, there needs to be new business, with new people, with new assets.

In a market scenario, where people are looking for efficiency and you are trying to retain market share by driving productivity, you need flexibility in terms of leveraging current assets and people. Saying that the same people can't be used in a new unit of SEZ, doesn't appear to be the most logical thing to do," Natarajan says. He cites the example of the recent Chennai floods that made a number of SEZs in the city dysfunctional. "To provide continuity of business, people and physical assets need to be moved.  But you cannot do that," the CEO says.

Dealing with the aftermath of the Chennai calamity needs more help.   

"The relief material imported should not have customs duty. And when a company is rehabilitating employees, do not treat them as perks," Senior Director of Policy at industry lobby body Nasscom Bishakha Bhattacharya says. To help the employees recover and rebuild homes, IT companies are providing cash advances, ex-gratia payments, transportation facilities, and school kits among others -  all of this is subject to tax as a perquisite under section 17(2) of the Income Tax Act.

Yet another IT industry ask from the government is around encouraging innovation. For long, the industry has followed a simple formula - more people equaled more revenues. But growing automation is drilling holes in this scheme. Companies have to invest more in research and development.

"R&D incentives are proposed to be curtailed. The IT sector has never been recipient of this benefit - given that the definition requires R&D for manufacture of article to be eligible. NASSCOM recommends the expansion of the scope to include IT specifically like it mentions Biotechnology. Further, if the current 200% deduction is reduced it should be at least 150% to support software product development efforts in the country," the lobby body states in a note.

The hope is, such support could help the industry navigate to the next level, a tad easy.

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