IT sector seeks incentives for R&D, software products

Also wants Finance Minister to lower safe harbour margins, reform labour laws

Hyderabad: The domestic IT industry, which contributed over nine per cent to the GDP with revenues of $143 billion, suggested the Centre to address several issues that have been haunting the sector for long. It also sought incentives for research and development (R&D) and software products.

Though the latest cash crunch after the demonetisation announced on November 8, 2016, had no much impact on the software sector, the IT industry is facing several challenges, say captains of the industry. We expect the upcoming budget to get some policy relief and government support, says BVR Mohan Reddy, Founder and Executive Chairman, Cyient, and Former Chairman, Nasscom.

“The software product development industry has been largely dominated by SMEs which has been suffering with the 10 per cent TDS levied on all software transactions, which has cascading effect on the performance. Finance Minister in his upcoming budget should address this issue to make sure that the government provides the required boost to the software product SMEs,” Reddy said. Reddy has been leading the IT industry to bring several challenges being faced by software companies to notice of the Centre.

He said, “Another issue that has been in discussion with government for a long time is the incentivizing of R&D. While India has been able to incentivize the manufacturing related R&D in India as being innovation, this has not been done in the IT sector so far. To make sure India transforms into a digital economy and embraces innovation, it is important that the government announces the R&D incentives for the IT and engineering industry as well during this budget. This has been already done in many countries like UK & Ireland”.

He further said there have been concerns around the unusually high safe harbour margins (ranging between 20-30 per cent). “This has to be revised to a lower rate which is more realistic based on the APA (Advance Pricing Agreement) data. Safe Harbour margins are high in transfer pricing and have not been adopted by the IT companies from India,” he said.

The domestic IT industry recorded exports of $108 billion in FY-2016. This was about 76% of the total revenues and contributed over 45 percent to the country’s services exports. Hyderabad recorded IT exports of Rs 75,070 cr in 2015-16 from Rs 66,276 crore in the previous fiscal. Hyderabad software industry achieved a growth of 13.26 percent against the national average of 12.3 percent.

Several software companies are also expecting withdrawal of withholding tax for overseas service purchase. Abhishek Rungta, CEO, Indus Net Technologies, said: “In a globalised world, such taxes impact competitiveness of IT businesses. Angel investing is not tax efficient. It needs to be structured such that successful entrepreneurs and executives find it easy to invest and startups are not penalized when raising money from these sources.”

The industry also requested the Centre to reform labour laws as IT companies feel that blue collar labours and white collar executives can't be treated in the same way.

Suman Reddy, MD, Pegasystems India, batted for tax reliefs to startups. “Building a cohesive ecosystem for entrepreneurs is a continuous process and we hope to see relief for the start-up community in the form of tax slabs expansion,” he added.

Additionally, rationalisation of MAT (minimum alternate tax) in special economic zones is another area where we can expect some traction, he added.