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Software services sector caught in procedural bottlenecks

BS Bureau

Software services are one of the fastest growing industry segments in the Indian economy. Overall, the software services market has grown at a compounded annual rate of 55.1 per cent between 1995-96 and 2000-01.

Growth in the software services sector is primarily driven by exports. The product, service and destination portfolio have witnessed significant changes in the recent past.

The industry is highly fragmented with over 5,000 players. At one end of the spectrum are companies with global operations and the necessary infrastructure and at the other are small companies operating in niche technology driven segments.

Being highly export oriented, the industry's growth is affected by the economic conditions of the destination countries. The slowdown in the US economy during 2001 has dampened revenue growth in the current fiscal. The US market accounts for over 60 per cent of the Indian software industry's revenues.

Further, the US recession has also led to a global slowdown. Thus, overall revenues in software services are expected to record a growth of around 30 per cent during 2001-02.

Companies whose operations were skewed largely in favour of onsite services have been worst affected--this includes many small and medium-sized players--while those with robust offshore models have weathered the prevailing market conditions better.

Key issues:

Indian software and services exports are facing competition from other Asian countries, which have emerged as more cost efficient in terms of skilled manpower.

The share of high-value products and components is considerably lower in the Indian software segment turnover. Only some companies have moved up the value chain to the product-based, packaged software segment or consulting.

The infotech sector requires a high level of communication infrastructure, which is still not available to a significant proportion of companies. This has a negative impact on the international business of many small players.

Factors that can be addressed in the Budget:

  • The focus could be on removal of procedural bottlenecks while sustaining existing incentives.
  • The government should consider reducing the cost of computerisation and making the domestic hardware industry more competitive as compared to imports, by lowering excise duty and sales tax.
  • The government could facilitate mergers and acquisitions by modifying Section 10A/10B of the Income Tax Act, according to which if, during a year, more than 51 per cent of the shareholding ownership changes in 100 per cent EOUs, STPs or EPZs then the company ceases to get income tax exemption from that year. This is a bottleneck for the flow of venture capital funds to the sector as well as a deterrent to mergers and acquisitions, which may be required for the industry to grow through consolidation.
  • Corporate Tax: At present, set-off and carry-forward of unabsorbed depreciation and accumulated losses are allowed only to industrial undertakings. Further, there are many pre-conditions, such as 75 per cent of the book value of assets must be held by the amalgamated company for five years and the continuance of business for at least five years. The first condition could be changed from 75 per cent to 50 per cent and the second could be dropped altogether because most companies in this industry have been established only in the second half of the 1990s.
  • The income tax exemption available on profits remitted to India by overseas branches of companies could be extended to dividends from overseas subsidiaries engaged in similar
  • activities.
  • Incentives designed to enhance the telecom infrastructure and allocation of more resources for power and the national Internet backbone will also benefit the industry significantly.

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