Indian Information Technology Services Sector And The Domestic User Industry - An Uneasy Partnership?

Indian Information Technology Services Sector and the Domestic User Industry – An Uneasy Partnership? Sachin Garg Navankur

Rashmi Sarita FICCI

Lokesh V. Larsen & Toubro

7th October 2009 Abstract India has grown to be a powerhouse in providing Information Technology (IT) Services to myriad clients all over the world. This sector has shown that it has what it takes to move beyond pure cost arbitrage and up the value chain. Despite the successes of this sector and its prowess in providing world-class solutions, there is empirical evidence which suggests that the domestic user industry remains woefully underserved for its IT requirements. This study theorises that this is due to the tax-break based incentives provided to the Information Technology Service providers, which have resulted in an environment where servicing the domestic IT users, especially the Micro and Small Scale Enterprises, becomes non-remunerative. Therefore, domestic industry’s use of Information Technology happens without any government aid or incentive. On the contrary, current government policies result in a number of missed opportunities, rendering Indian businesses uncompetitive. In this paper, we analyse the impact of export oriented tax incentives on the domestic sector and attempt to identify a few policy mechanisms that could obviate their negative effect.

1

Introduction

Over the last three decades and more, the Indian IT industry has matured to be a major world player. The sector has grown by leaps and bounds in the last two decades. Current estimates [1] put the IT–BPO services sector to account for almost USD 60 billion in revenues for FY ’09. As a proportion of national GDP, the sector revenues have grown from 1.2 per cent in FY1998 to an estimated 5.8 per cent in FY2009. Net value-added by this sector, to the economy, is estimated at 3.5-4.1 per cent for FY2009. The sector’s share of total Indian exports (merchandise plus services) has increased from less than 4 per cent in 1998 to almost 16 per cent in 2008. These figures could be on the higher side, partly because they also account for the Business Process Outsourcing (BPO) industry estimates. It is difficult to find standalone figures that tell only the Information Technology story. Also, as Ms. Jayati Ghosh points out with regards to 1

the IT sector in [2], “data on its performance remains extremely limited and inadequate. In fact, while the rapid growth of the industry cannot be denied, there is increasing evidence that the size of the industry’s revenues and contribution to GDP is exaggerated, because there is no proper effort being made to independently evaluate the industry’s performance.” The fact remains that till now the industry has had a phenomenal run and been responsible in no small measure for India’s current growth. Keeping all this in mind, we also note that the country has not made great strides where the use of IT by the domestic users (especially where the Micro, Small and Medium Enterprises (MSMEs) are concerned). According to the 2008-09 Global Information Technology Report (GITR), brought out by INSEAD in collaboration with the World Economic Forum, various measures, India ranks #30 on the Business Usage Index metric (just below Ireland but above Chile and Brazil) [3]. In this paper we argue that this dismal situation is because of the skewed incentive structure of the Information technology sector which subsidises IT users abroad at the expense of the Indian users. The paper starts off with a brief analysis of the sector—its growth patterns, delving into some of the growth factors and a brief look at the incentives provided to the sector. Next, we broadly look at the subject of tax incentives while paying particular attention to the IT sector. We then propose our hypothesis that tax incentives in the current form push up IT costs for domestic users, while subsidising them for foreigners. We conclude with some recommendations to improve on the status quo and ensure accessibility to IT solutions for all classes of domestic users.

2

Indian IT Sector

Over the course of its history, the Indian IT industry has been through a number of phases (see Figure 1), starting with extremely low value-add body-shopping work to doing high-end consulting today. Currently, the industry is characterised by the presence of a few very large companies with a couple of billion dollars in turnover, each employing in excess of 50,000 people. The majority of these companies provide outsourced services to their overseas clients. These services include maintenance of existing software, development of new software, remote infrastructure management, product design and development and increasing amounts of IT and business consulting. The Indian IT sector has been the subject of many studies that have attempted to identify some of the several factors responsible for the incredible growth of this sector. Rafiq Dossani [4] has traced the origins and growth of the industry. The most comprehensive treatise of the sector’s growth, aptly titled “The Long Revolution” has been chronicled by journalist Dinesh C. Sharma [5]. Some of the key factors that many of these studies have listed out are: Demographic factors. India is possesses a demographic advantage over other nations by virtue of its ? very large pool of English speakers, 2

Value Addition

IP Focused Development Consulting Projects Offshore Onsite Body Shopping Time Figure 1: Phases in the Indian IT Sector

? large pool of scientists and engineers, ? young populace entering the job market, ? cost benefits Government Policy Reforms Despite many assertions to the contrary, the sector has received substantial help from the government both by easing-up on regulations as well as other measures (tax-exemptions) which have gone a long way. Economic Liberalisation The sector has also benefited from the larger opening up of the Indian economy, for example, de-regulation of the telecom industry, easing of FDI norms, reduction of duties on computers and electronic devices etc.

2.1

Sector Analysis

To better understand the industry at this juncture, we present a “Strengths, Weaknesses, Opportunities and Threats (SWOT) Analysis” of the industry in Figure 2. We note from this SWOT analysis, that the newer opportunities that could come business’s ways are in areas where the companies could leapfrog the competition and try to sell their products and services to the “Bottom of the Pyramid” consumers in the emerging economies. As pointed out by one of the authors in [6], it is imperative that the Indian Software Services move out of doing business conventionally and start investing resources to build solutions for the next 1 billion consumers thereby creating real value. As shown in Figure 1, though the industry has slowly but steadily been moving up the value chain, we feel that it is still concentrating too much on either process innovations or incremental innovations, and refusing to take a greater leap of faith. 3

Strengths

Weaknesses H Productivity is not

H Mature Industry —

keeping the desired pace H Skewed structure — small number of large firms H Manpower supply constraints

substantially high on the Value Chain

H Strong and Vibrant domestic IT market

Opportunities

Threats H Rising factor costs

H Global vendors playing

resulting in lowering advantages on the cost-arbitrage alone H Emerging competition from Latin America, Eastern Europe and China

in the domestic market

H Leapfrog opportunities. These require strategic direction and long-term thinking H Bottom of Pyramid Innovation

Figure 2: SWOT Analysis of the Indian IT Sector We also note from the figures in [1], that the sector is heavily skewed towards exports with over 2/3 revenue being generated from exports. On top of this, the USA is the largest partner accounting for over 60% of exports. So, when the US catches a cold as has happened now, the sector comes to a standstill. Even amongst service lines, BFSI (Banking, Finance Services & Insurance) accounts for over 41%. As those in the industry know, most of the work in this sector continues to be low-end work, mainly concerned with sustaining current business systems and processes. One of the authors, in an April 2009 blog posting [3] has analysed the state of the domestic market and talked about the benefits of involving the larger services companies more in the domestic market.

2.2

Information Technology Sector Incentives

The Information Technology sector has been the recipient of may incentives, both directly and indirectly. One of the largest direct incentive schemes for promotion of the sector has been the Software Technology Parks of India (STPI) scheme. This scheme is for setting up of software development and IT enabled services unit in India for 100% Export. The salient features of the scheme [7] are: 4

? 100% Income Tax Holiday as per section 10A of the IT Act. ? 100% Customs duty exemption on imports ? Equipment can also be imported on loan or lease basis. ? All relevant equipment/goods including second hand equipment can be imported (except prohibited items) ? 100% excise duty exemption on indigenous procurement. ? Central Sales Tax reimbursement on indigenous purchases. ? Green card enabling priority treatment for Government clearances/other services. ? 100% foreign equity investment in the companies permissible under the ‘Automatic Route’ of RBI. ? Sales in the DTA (Domestic Tariff Area) up to 50% of the foreign exchange earned by the unit. ? Software units may also use the computer system for training purpose (including commercial training). Apart from these features, STPI units were also provided with ? Single Window Clearance ? Basic Infrastructure, including high speed dedicated data communication links at a time (the 1990s) when the telecommunications sector was heavily regulated Other governmental policy interventions that indirectly incentivised the IT sector was the substantial investments in building up of human capital — the setting up of multiple institutions of higher learning aimed at the IT sector, the permissive policy in allowing the starting up of many new engineering and technological institutes. Other factors have been the promotion of this sector by various state governments by way of providing large land tracts at virtually throw-away prices, allowing developers leeway in development of technology parks by way of increased FSI or the reduction in land requirements for software units setup in Special Economic Zones (SEZs). As time has passed, the major factors drawing Export Oriented Units (EOUs) towards STPI were the “single window clearance” and provision of basic infrastructure and communication links, along with customs exemptions. As the nation has liberalised, many of these factors have become moot and the one that still draws companies is the tax incentive. That is also a reason why many companies are rushing towards the SEZs, even if it means substantial one-time costs related to de-bonding of existing equipment in STPI, re-negotiating contracts1 etc. In §3 we look at these tax exemptions in greater detail. 1 Customs bonded equipment in an STPI facility cannot be transferred to an SEZ and also all SEZ projects should be new ones. Therefore, companies have to terminate their existing contracts and negotiate fresh ones in order to claim SEZ benefits. That may be right in the letter of the law, but definitely not in its spirit.

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3

Tax Concessions

It is well understood by economists and innovation researchers that markets fail to fully fund innovations because they are unable to appropriate the entire benefits of the innovation to themselves. Technology inevitably leaks, leading to a Rate o f ReturnSocietal > Rate o f ReturnPrivate

(1)

The differential between the two returns is known as the Spillover Gap = Rate o f ReturnSocietal − Rate o f ReturnPrivate

(2)

An innovator wishes to minimise the Spillover Gap, but since it cannot and should not be entirely eliminated (to prevent monopolistic, rent-seeking behaviours), society working through governments has to step in and bridge the gap. Hall and van Reenen in [8] say “A tax-based subsidy seems the market-oriented response as it leaves the choice of how to conduct and pursue R & D programs in the hands of the private sector.” As with any incentive to spur innovation, tax incentives also have their downside. An especially important downside is that though one would want to promote projects that have the largest spillover gap, the private sector would want to take the credits for those projects that have the largest private rate of return [8]. Therefore, it is important to continuously assess the impact of these tax incentives. According to the 2009 Government of India document [9](emphasis author’s), The amount of revenue raised is determined to a large extent by tax bases and tax rates. It is also a function of a range of measures—special tax rates, exemptions, deductions, rebates, deferrals and credits—that affect the level and distribution of tax. These measures are sometimes called “tax preferences”. They have an impact on Government revenue (i.e. they have a cost) and reflect the policy choices of the Government. Tax preferences may be viewed as subsidy payments to preferred taxpayers. Such implicit payments are referred to as “tax expenditures” and it is often argued that they should appear as expenditure items in the Budget. In this context, the basic issue is not one of tax policy but one of efficiency and transparency—programme planning requires that the policy objectives be faced explicitly; and programme budgeting calls for the inclusion of such outlays under their respective programme headings. Tax expenditures are spending programmes embedded in the tax statute.

3.1

Cost of Tax Incentives

Tax incentives do not come cheap. Added to the real exchequer loss is the cost of administering the incentive, both to the government and the firm claiming the incentive. In real life, it would be quite difficult to compute the administration costs, so we would work with estimated exchequer losses. According to the budget estimates titled “Revenue Foregone under the Central Tax System”, which has been presented as part of the Union Budget since 2007, these tax expenditures are 6

FY 2005–06

FY 2006–07

in Rs. Crore

as a percentage of Gross Tax Collection

in Rs. Crore

as a percentage of Gross Tax Collection

206700

56.43

235191

50.27

FY 2007–08 as a percentage in Rs. of Crore Aggregate Tax Collection 285052 48.16

FY 2008–09 as a percentage in Rs. of Crore Aggregate Tax Collection 418095 68.95

Table 1: Total Revenue Foregone over the years. Note the difference between the “Gross Tax Collection” which “refers to the aggregate of direct and indirect tax collected by the Central Government” and “Aggregate Tax Collection” which “is the aggregate of net direct and indirect taxes collected by the Central Government”. Source: [10, 9].

Foregone Corporate Tax on Export Profits of STPI units and units located in SEZs, EPZs and FTZs (section 10A and 10AA) (in Rs. Crore) FY 2005–06 FY 2006–07 6870 9938

Foregone Corporate Tax on Export Profits of STPI units (section 10A) (in Rs. Crore) (Body Corporate + Partnership Firms/Association Of Persons/Body Of Individuals) FY 2007–08 FY 2008-09 10591 + 51 11734 + 55

Table 2: Corporate Tax Revenue Foregone over the years. This is only units situated in STPI and similar EOUs, therefore a good proxy for the IT Services sector. Note that the 2005–06 and 2007-08 figures also include non-STPI units. Source: [10, 9]

substantial, and increasing over time. We have given the figures from the 2007 and 2009 Revenue foregone documents of the 2007 and 2009 Union Budgets [10, 9] in Table 1. From that we see that the revenue foregone on account of the various tax exemptions is nearly half, and in 2008-09 was 2/3 of the Aggregate Tax Collection.

Customs Revenue Foregone from EOU/EHTP/STP (in Rs. Crore) FY 2005–06 FY 2006–07 FY 2007–08 10277 13651 18978

FY 2008-09 13401

Table 3: Customs Revenue Foregone on account of Export Promotion Concessions over the years for EOU/EHTP/STP units. Source: [10, 9] 7

3.2

Cost of Tax Incentives to IT Sector

From the 2007 and 2009 Revenue foregone documents [10, 9], we can get the figures of revenue foregone by the government by way of Corporate Tax. These figures are tabulated in Table 2. Also, the figures in Table 2 are only the corporate tax figures. A fuller appreciation of the entire tax-break scenario can come in only when one looks at other exemptions that the sector gets by way of: ? 100% Customs Duty Exemptions. This is a very large chunk as can be seen in Table 3. ? 100% Excise Duty Exemptions ? Non-payment of Service Tax ? Non-payment of Value Added Tax ? Central Sales Tax reimbursement on indigenous purchases. These other exemptions could be captured by looking at the Effective Tax Rate2 . According to [9], the Effective Tax Rate for the IT Sector is 12%, while [2] puts it at a measly 6.38%. It is important to appreciate the significance of these numbers, especially in light of the revenues that the top-tier companies generate. For example, Infosys Technologies generated revenues of Rs. 20,264 crore in 2009 with a gross profit of Rs. 9,119 crore - which is less than the amount the government gave away in corporate taxes or even on account of customs duties! We have till now pointed out the enormous amount of revenues foregone by the government in the form of tax incentives to the IT Sector. Now, the time has come to discuss why we feel that the continuing tax breaks are harming the domestic industry and holding back the latent innovation and potential of this high-growth market. We look at this aspect in §4.

4

Our Hypothesis

As pointed out in §2 and quantitatively illustrated in §3.2, the tax-breaks given by the government to the Export Oriented Units in the IT sector is the major factor responsible for the phenomenal growth of the industry. There is also empirical evidence that the industry has grown so used to these tax breaks that it is unable to think of a life without such incentives. Industry clamour for the last two years against removal of these breaks in the run-up to every budget and the recent extension of the STPI scheme, as well as many companies’ attempts to move parts of their business to SEZs help to bolster this view. Though to be fair, a personage no less than Mr. Narayan Murthy of Infosys has spoken out against continued tax breaks for the IT sector3 , but he is in a minority. Also, it is not sure whether he was only referring to the Corporate Tax breaks 2 Effective tax rate in case of companies is the ratio of total taxes paid [including surcharge and education cess but

excluding Dividend Distribution Tax and Fringe Benefit Tax] to the total profits before taxes [PBT] and expressed as a percentage. 3 Narayan Murthy not in favour of Income Tax Exemption for IT Industry at http://www.taxguru.in/incometax/narayan-murthy-not-in-favour-of-income-tax-exemption-for-it-industry.html

8

or other breaks to the sector by way of excise & customs duties and exemptions on service tax and VAT. We concur with Mr. Murthy in that these tax breaks have outlived their usefulness and currently serve to seek to hold back innovation, especially where it concerns the domestic user industry. We argue that tax breaks for the domestic IT services sector is preventing companies from using their expertise in solving local problems, thereby not allowing Indian domestic IT users to serve the needs of their customers in an efficient and cost-effective manner by judicious use of Information Technology.

4.1

IT Sector Tax Incentives

We have talked about the STPI scheme in §2.2. We will use this scheme as our model for understanding a few critical points about the way these incentives are provided. It is important to understand (a) to whom are these incentives being provided, and (b) what is the precise nature of incentives being provided. This will help us to better appreciate how these incentives harm those non-preferred personages that are ineligible for the incentive, and prevent them in providing much-needed social goods. 4.1.1

To Whom?

The STPI incentives are limited to those Export Oriented Units which are Net Foreign Exchange Earners (NFE). Thus a software development/consulting entity which is not in the business of exporting its services, that is someone who only serves the needs of the domestic sector is ineligible for any of these benefits. 4.1.2

What Incentives?

As discussed in §2.2, apart from facilities like “single window clearance” and basic infrastructure, which are moot in today’s business scenario, the tax incentives are: ? 100% Income Tax Holiday as per section 10A of the IT Act. ? 100% Customs duty exemption on imports ? 100% Excise Duty Exemptions ? Non-payment of Service Tax ? Non-payment of Value Added Tax ? Central Sales Tax reimbursement on indigenous purchases. 9

4.2

Impact On Domestic Sector

We note in §4.1.1 that these incentives are limited to those entities which are NFEs. Many organisations who primarily serve domestic industries, especially the Micro, Small and Medium Enterprises (MSMEs) will not be NFEs and therefore ineligible for such incentives. To understand the impact of this, we will look at an example comparing an NFE and a non-NFE doing similar work. In this example we will assume that an Indian customer wishes to customise a piece of software and this contract requires the provider to invest in some computer systems. Net Foreign Exchange Earner (NFE)’s Costing ComputerCostNFE = SystemCostNFE k Assembled SystemCostNFE

(3)

SystemCostNFE = SystemCostUSD +CIF

(4)

Assembled SystemCostNFE = Component CostUSD +CIF

(5)

Customer QuoteNFE = All Costs + Margin

(6)

Post Tax EarningsNFE = Margin

(7)

Non Net Foreign Exchange Earner (NNFE)’s Costing ComputerCostNNFE = SystemCostNNFE k Assembled SystemCostNNFE

(8)

SystemCostNNFE = SystemCostNFE +Customs LevySY ST EM

(9)

Assembled SystemCostNNFE = Assembled SystemCostNFE + LeviesASSEMBLED

(10)

LeviesASSEMBLED = Customs LevyCOMPONENT + Excise LevySY ST EM

(11)

Customer QuoteNNFE = All Costs + Margin + Statutory Levies (Service Tax/VAT ) Post Tax EarningsNNFE = Post Tax EarningsNFE − Taxes (≈ 23%)

(12)

(13)

From these equations, we note that a non-NFE faces a triple whammy in doing business vis-a-vis an NFE. 10

1. Its cost of doing business increases by virtue of having to pay customs and excise levies on systems or components procured as capex. 2. The quoted price increases because of statutory levies like service tax, VAT and CST. 3. The post-tax earnings are substantially reduced due to corporate income tax liability. These factors result in the non-NFE becoming less competitive then the NFE, resulting in very few people exclusively focusing on the domestic markets, thereby handing the market to the NFEs on a platter and giving them a larger share of the local pie. This might not look too wrong in the normal scheme of things, but a little digging is in order here, especially because the NFEs primary revenue is generated overseas and the domestic sector is not necessarily their focus.

4.3

NFE & Domestic Markets

NFEs by virtue of their business continue to be focused on their export business. The reasons for this are not far to seek: ? Margins are high, almost 25%–30% ? Easier to do business—since most of the work continues to be maintenance and enhancement, companies prefer to outsource it so as to get their own highly paid labour working on new innovations ? Bulge mix is favourable to the service provider—large numbers of young, inexperienced and even fresh employees can be put on the job ? Employees get opportunities to work on-site or travel, thus ensuring retention ? The rupee is weak against foreign currencies, companies are spending rupees and earning tax-free dollars, every dollar adds much more to the topline This intense focus on the export market leads to a negative, cascading effect on the domestic sector. We outline some of the effects below. Effect of Foreign Market Focus One of the biggest effects of the foreign market focus is the lack of skilled manpower capable of rising to the challenges faced by a young, emerging economy untethered by past-practises and willing to experiment. ? Domestic problems are challenging, requiring fresh, innovative and out-of-the-box thinking. Most of the experienced people capable of taking up new challenges and re-writing the rules of the game, by providing focused leadership are inevitably placed on overseas projects. This absence of experienced guides ensures that most domestic projects continue to repeat their mistakes. 11

? Senior people outgrow their technical roles very fast due to the lack of challenges (most of the work is low-end, repetitious and monotonous) and inevitably switch to project management roles to continue along their career path. This ensures that the industry continues to suffer from a lack of senior people well-versed in the design and implementation of fresh technology solutions. ? Management is not willing to put seasoned and talented resources to the domestic market because their higher margin foreign clients want the best talent to work for them, even though the individual’s skills may not be completely utilised. ? Management invariably focuses on their foreign clients, thereby ensuring that quality of local market deliverables is often poor. Another effect is related to the lack of solutions and products designed with the domestic consumer in mind. This leads to either expensive retrofit of existing solutions or monopolistic behaviours in the few vendors having these products. ? The lack of solutions suitably designed and developed for the domestic sector forces consumers to either build solutions using their own in-house and often not always fully-skilled teams, or to buy and retrofit existing solutions. ? Severe lack of competition in the local market leading to rent-seeking, monopolistic behaviour by the incumbents. We also note that this focus on the export market creates an unfortunate situation where companies that wish to partake of the higher-end service offerings of NFEs seek out ways to circumvent export regulations. We look at one of the mechanisms in §4.5.

4.4

Need for Domestic Sector focused Companies

Based on the discussion till now, it becomes obvious that the domestic users need to leverage Information Technology and enable themselves to efficiently use IT solutions geared to their needs. Therefore, it is imperative that our IT organisations build innovative and out-of-the box solutions while keeping in mind the needs of the domestic consumers and constantly engaging with them. For this to happen, IT organisations will have to focus on the domestic sector with renewed vigour and place some of their best people to do the job. All of this requires that companies may have to shift focus from their foreign projects. As discussed in §4.3, this cannot happen as long as companies have to be Net Foreign Exchange Earners. Therefore, a new breed of companies needs to come up, a breed single-mindedly focused on the domestic sector. These companies should focus on developing and providing innovative Bottom of Pyramid (BOP) solutions at domestic price points especially to the MSMEs. Many innovation surveys have shown and experts agree that the most innovative enterprises are those that are small, close to the customer with an ear to the ground. This implies that the MSME sector is the one that has the potential for the largest growth. Information technology is 12

a growth enabler and having successful and efficient IT solutions complementing the business is often a given to succeed. Unfortunately many of the MSMEs so not have the deep pockets to be able to engage the large providers on their terms and therefore are unable to leverage the immense benefits that IT could potentially give them, thereby stagnating their growth. Creating this new breed of domestically focused companies would require a significant shift in the mindset of the industry and its talented pool of people and difficult to achieve while the NFEs continue to garner the best people by paying above market compensation and other fringe benefits, by virtue of their inherently higher margins compounded by government provided tax incentives. Going forward, we feel that will be a significant challenge. We outline certain remedial measures in §5.

4.5

Gray Areas

Considering the benefits that the larger IT services companies bring to the table, some of the domestic consumers who have the ability to shell out overseas billing rates actually get their work done by means of an overseas subsidiary (more often than not, a shell company floated for this very purpose) which in turn farms out the work to one of the larger IT services company. This mechanism ensures that the IT Services company can book exports, thereby paying no Corporate Income Tax, get customs and/or Excise duty benefits and also does not need to levy any Service Tax and VAT etc., thus keeping its margins intact. The domestic consumer can then import the software from its foreign subsidiary by some royalty mechanism etc., all in all resulting in a large IT service provider doing the work while avoiding payment of the statutory levies. Another not so healthy practise is companies moving existing STPI operations to SEZs in order to continue getting tax exemptions. We had briefly touched on this aspect in §2.2. Companies are technically not allowed to shift existing projects in STPI units to SEZs because all SEZ projects are supposed to new business. Some companies are circumventing these rules by pre-mature cancellation of existing deals and signing on newer contracts and executing these new contracts in SEZ units.

5

Conclusions & Recommendations

We note from the foregoing discussion that today’s environment is not at all conducive to providing domestic users their much needed Information Technology edge, simply due to the absence of qualified service providers with the scale, abilities and willingness to serve them. If India is to continue on its growth trajectory, this state of affairs cannot be allowed to continue. The Indian taxpayer has subsidised the western companies for too long, and it is time that the playing field be levelled in favour of those nimble and innovative domestic companies that have the potential to leverage Information Technology in their quest towards inclusive growth by leapfrogging the competition. 13

5.1

Remedial Measures

To remedy some of the defects in the current scenario pointed out and ensure that innovation continues to happen and the benefits of Information & Communication Technologies (ICT) percolate down to the people, it is important that the playing field currently heavily skewed in favour of large NFEs be levelled out so as to allow domestically focused non-NFEs in providing IT benefits to their consumers. Therefore, it is time to have a long, hard look at the entire Information Technology sector as a whole and identify those parts of the system that no longer need incentives. Incentives should move from being broad-based and export-focused to targeted and a judicious mix of both export oriented and domestically focused. We understand that while industries are setting up and developing innovative Bottom of Pyramid (BOP) solutions they do need a revenue stream to fund such innovations. An export-focused services business is a reasonably good way to ensure a steady cash-flow that could help build new solutions. Unfortunately, the problem with this “easy cash” is that instead of being a means to an end, it becomes the end itself. This is what companies should avoid and pursue their innovations to the end.

5.2

Proposed Policy Measures

We propose certain policy recommendations for starters: 1. The Government should not continue to extend tax incentives to the large companies who are involved in run-of-the-mill Export Oriented businesses. Such tax incentives if they need to be given should be limited to companies that can show tangible value creation for their clients 2. A policy to reduce the inequities between companies serving the domestic and export sectors should be promulgated. This could be by way of giving some incentives to those companies that are involved in various societal measures like e-governance, companies involved in cutting edge technologies and other identified sectors 3. Certain tax incentives could be provided to companies that are involved in developing software products for use of the local markets. 4. A comprehensive and independent study that clearly demarcates between the various subparts of the IT industry and their contributions to the economy, as well the impact of various policies be carried out. 5. Another study that looks at the Information Technology costs of the user industries and compare them with their peers in other economies should be done to understand how various policy decisions intended to benefit the Information Technology sector impacts user costs. 14

6

Acknowledgements

This paper grew out of a presentation that the authors gave at the UNU-MERIT Training Programme in Design and Evaluation of Innovation Policies (DEIP) held at New Delhi in February 2009. The authors would especially like to thank Prof. Dr. Adam Szirmai and Dr. Sunil Mani for their valuable suggestions. We are also thankful for the support given by the programme participants.

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Authors’ Bio: Sachin Garg is the Principal Consultant with Navankur, a consulting startup focused on providing innovative, economical & scalable Information Technology solutions to Micro, Small and Medium Enterprises. He has over 12 years of diverse industry experience. He is currently focused on the innovative use of technology to solve real-world problems. As part of that focus, he attended the prestigious “Design and Evaluation of Innovation Policies”, an international training programme conducted by the United Nations University-Maastricht Economic Research Institute on Innovation and Technology, Maastricht, The Netherlands. He holds a Masters degree in Computer Science Engineering from the Motilal Nehru National Institute of Technology, Allahabad and a Bachelors in Electronics Engineering from the National Institute of Technology, Rourkela. He can be reached at: [email protected] Rashmi Sarita is a Senior Assistant Director with the Federation of the Indian Chambers of Commerce and Industry (FICCI). She currently looks after the Science & Technology section, concentrating on innovation. She has also worked with FICCI’s Intellectual Property Rights division. She holds a Masters in International Business from the Delhi School of Economics. She can be reached at: [email protected] Lokesh V is a Senior Executive—Intellectual Property Management & Innovation at Larsen & Toubro Limited, Mysore and a Member of All India Management Association, New Delhi. At L&T he is responsible for IPR Management as a part of Strategic Planning & Initiatives of the Electrical & Electronics Division. With a background of Mechanical Engineering, he had worked for several years in Mechanical Design & Development for its Medical Equipment and Systems at L&T.He also has a Masters degree in Commerce, Post Graduations in Business Administration and Intellectual Property Law Rights.He has published & presented three national & two international papers related to Innovation & Intellectual Property Rights. He is the winner of “India Innovation Challenge Award 2008” at India Innovation Summit 2008 - Organised by CII & Govt. of Karnataka. He can be reached at [email protected]

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