IT’s all happening in India

The Indian information technology (IT) growth engine, hitherto dominated by software services and business process outsourcing, appears set to be spurred by ‘Next-Gen’ technologies and services.  Pundits predict a data centre boom, with cloud services expected to overtake and possibly overwhelm the traditional on-site infrastructure and perpetual software licensing models.

The proliferation of cloud, mobile, online retail and social media usage has also created a potentially insatiable appetite for new security innovations in data encryption and protection. Cyber security threat perception and mitigation is expected to be a priority for the public as well as private sector, including individuals. This, coupled with continuing growth in new technologies and platforms is expected to aid developers of new applications or ‘apps’ to feed an ever growing need for technology products and services.

A key challenge for the fast-growing IT sector has been that the Indian laws have not kept pace with technological and operational advances

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Big data is touted to be the next ‘big’ thing with the virtual world making serious inroads into our real and physical world. The Indian government’s agenda of ‘smart cities’ appears well timed given an average individual’s home-front is dominated by ‘smart’ gadgets, with a potential threat of smart workers and drones replacing engineers on the work front.

Historically, a favourable and unrestricted foreign investment policy has aided the IT sector’s growth in India. In this backdrop, the Indian government’s initiatives of ‘Make in India’ and ‘Digital India’ appear to be well positioned to tap into these emerging trends to reaffirm India’s position as a global IT major. The focus of Union Budget 2015 and The Foreign Trade Policy 2015-2020 on technology startups and measures to digitise as well as ease business operations in India for cutting out the proverbial red tape should benefit this sector.

While these measures are indeed welcome, there is a certain level of apprehension that India has fallen behind some of the other emerging economies in being a premier investment destination, with some of these measures being too little, too late. Specifically, the non-inclusion of IT/ITeS services under the recently introduced Service Exports from India Scheme (SEIS) incentives has been a huge disappointment. This is being viewed as a message from the government that this sector is not set to receive any further tax incentives/benefits going forward.

The Indian IT services sector is dominated by exporters of software as well as IT-enabled services.  Current perception is that the first movers in this sector appear to have somewhat lost their competitive edge with the sunset on income tax holiday coupled with increasing rates of indirect taxes (particularly service tax) and continuing challenges/inordinate delays in recouping refund of taxes paid. This has raised serious concerns on the very viability of the traditional export oriented unit (EOU) including Software Technology Parks (STP) scheme. In this backdrop, benefits from non-extension of the Merchandise Exports from India Scheme (MEIS) and the SEIS scheme to EOUs/STPs has been a further blow to the expectations of the exporting community. With GST on the anvil, there is a sense of hope as well as apprehension on its impact on EOU/STP exports. While it is believed that some of the existing indirect tax exemptions (such as duty exemptions on procurement of capital goods) may get converted into a refund scheme, there is hope that refund of GST will be considerably fast-tracked.

However, the industry’s wish list for a viable alternative scheme for extending tax holiday/corporate tax incentives to encourage investors (especially multinationals engaged in exports) to choose India as a preferred investment destination and to render Indian IT exports competitive in the international arena appears to remain unfulfilled given the overall policy to minimise tax exemptions and broad base the tax base.

In contrast, while the Special Economic Zone (SEZ) scheme continues to be poised well from a tax and regulatory perspective, access to income tax holiday has been somewhat marred by the introduction of minimum alternate tax as well as restrictions on migration of existing business into the zone from an income tax holiday purpose. SEZs however continue to maintain a preferred status from an indirect tax benefits perspective and it is hoped that this continues under GST as well. Service tax exemption alone is currently an attraction for migration of existing businesses as well as housing of new business in a SEZ.

A key challenge for this fast-growing sector has been that the Indian laws have not kept pace with technological and operational advances of the sector. For example, India’s booming online retail and cloud business is sought to be governed by laws framed in the context of tangible and traditional brick and motor businesses. As a result, businesses and tax administrators are often seen grappling with applying archaic laws to a futuristic world. A case in point being the inability of Indian laws to effectively recognise the market place model under ecommerce, including challenges under Indian VAT laws to allow vendors to virtually register goods held on their behalf by the ecommerce service provide without a physical presence in the state.

With the blurring dividing lines between the real and virtual world, there is also a constant debate on the characterisation of technology-driven products as ‘goods’ vis-à-vis ‘services’. This debate appears set to stay till goods and services are taxed on par under GST. With fiscal powers with regard to the taxation of goods and services presently divided between the Centre and states, overlap as well as dual taxation of electronic supplies as both goods and services continues to plague businesses in India. Examples of this include lack of clarity on the treatment of electronic supply of software, e-books and other electronic downloads, as well as certain types of cloud infrastructure, including cloud offerings as ‘goods’ vis-à-vis ‘services’. It is perhaps time for India to borrow a leaf from international practices which generally seek to treat electronic supplies as services. This would, however, entail state governments relinquishing their traditional treatment of such supplies to be goods.

In this backdrop of India’s existing laws trying to catch up with new businesses and business models, it is hoped that GST would futuristically address the needs of the information technology sector, recognising these trends and building into the law certain flexibility to address emerging issues and opportunities of this sector.

-    By Mahesh Jaising, Partner, BMR & Associates, LLP with inputs from Jayashree Parthasarathy, Director, BMR & Associates, LLP. Views of the authors are personal 

The thoughts and opinions shared here are of the author.