“They’ll push, and I’ll say no, and they’ll push again, and I’ll say, to them, ‘Read my lips: no new taxes. ” The now famous sentence helped George H. W. Bush get elected as the president of USA in 1988. Election promises have always been far and wide and everywhere. It will be interesting to see how the ‘Economist’ in P. Chidambaram deals with the pressures of the political compulsions when he presents the last full year budget for the UPA government on Feb 29.
As far as the IT services industry is concerned, it has come a long way from being a nascent industry. The revenues look robust in the medium-term horizon of 3-5 years and the offshoring trend should continue. The industry, however, faces major challenges on spiraling cost. I for one would not like to look on the normal rhetoric of the budget some relief here and minor adjustments there. We need some key initiatives and the IT industry would keenly observe our FM s initiative around these areas.
Investment into Education System:
While industries continue to face manpower crunch, the ground realities are just very different. We are young with 70 percent of our population less then 35 years of age. However, only 6 percent cross Class 12. Out of the graduates, 72 percent are from Arts stream alone. Is this relevant today? There is an absolute disconnect between the education system in India from what the industries need.
Interestingly, if there is one area where we have trained Indians to global standards, it is in the area of IT and software. Much credit goes to the trainings provided by private participation. India has no known manpower plans, which are relevant for the present and future world markets or to plan for the onslaught and opportunities because of globalization.
To me, the first step of making India a knowledge economy is literacy and needs to be given priority. The total amount spent on education is 3.3 percent of GDP. This needs to go to 8 percent of GDP, and may be 4 percent can be through private participation in an environment where they are given tax breaks and incentives. After all, education is associated with better skills, higher productivity and enhanced human capacity to improve the quality of life.
With 17 percent of the world population we could be a powerhouse of Human Capital, provided we make them ‘employable’.
Continuation of STPI (Software Technology Parks of India) Scheme beyond 2009:
STPI Scheme has proven to be a big success and a major contributor to the growth of Indian economy. (IT-BPO exports: US $32 billion, 1.6 million direct hires and may be up to 4 times indirect beneficiaries). The tax holiday breaks have helped nurture/support the industry and the growth has helped spread wealth and employment. The extension of tax holidays for STPI units beyond 2009 will help them come at par with those available to the SEZ units. This will help sustain growth to the sector already reeling under the impact of strengthened rupee and slowing global growth. We are at a critical juncture, facing intense competition from other countries and our spiraling costs (unless taken care of) can prove to be detrimental to us in the global market.
Totalization Agreement with the US:
Currently, the United States has Totalization agreements with 18 countries that allow H-1B Visa holders to be exempted from Social Security. Indian government should proceed to sign the Totalization agreement with the US government. There is a substantial cost that Indian IT industries have been bearing because of it. According to an estimate, the total forfeited sum comes to about $1 billion annually.
Advance Pricing Agreements (APA) to provide for upfront tax certainty:
We are functioning in a global business scenario. The MNCs coming to India are looking for more business confidence. The Transfer Pricing regulation is complicated and provides uncertainty. We need the government to come up with the APA mechanism to provide for tax certainty and avoid adjustments that come after 4-5 years of protracted litigations and tax assessments. Almost all major economies, such as Europe, the US, Canada, and Japan, provide for similar tax legislation and India needs to follow suit.
Improvement of infrastructure:
The IT industry, along with many other industries, has been concerned about the slow progress on infrastructure projects. Basic amenities like continuous supply of electricity are an issue in Tier 2 and Tier 3 cities. Our investments on roadways have been much lower, leading to slower development. The same holds true for the airline industry leading to choked airports and skies. Flying over the Delhi skies for 45 minutes before landing has become a ritual. Where are we headed?
The investment in infrastructure should be aligned to match the overall growing IT and manufacturing sectors. China spends 9 percent of GDP on infrastructure, India 4 percent. One percent additional investment means an increase of $ 75 billion. Further, an increase in investment always have a multiplier effect; for every rupee invested, four rupees of GDP is generated.
Abolish dividend distribution tax:
Dividend distribution tax, provided under section 115-O of the Income Tax Act, has had very damaging impact on India’s prospects of inviting foreign direct investments and becoming a global investment hub. It has substantially enhanced cost of equity/equity-related instruments in Indian markets, and therefore more and more foreign parent entities are turning to debt as a source of financing Indian subsidiaries – thereby raising the debt burden of the country. Further, there is no mechanism to claim set-off in respect of DDT paid by Indian subsidiaries of foreign parent entities in the double tax avoidance agreements signed by Indian Government and therefore, in effect, DDT is a sunk cost. Earlier, when the dividend incomes were taxable in the hands of shareholders, credit/set-off was available to foreign parents under the provisions of tax treaties.
India’s strong economic performance has been the consequence of steady reforms over the past 17 years. Overall prospects for India’s growth and macroeconomic stability remain positive. We will look forward to our FM to accelerate key reforms to help us sustain a high growth path.
(The author is the Vice President of Fujitsu Consulting India)