Money

The India story for the IT sector began with organisations relocating their business processes, and was characterised by high-volumes, cost-reduction, labour-intensity and support functionality, available in India.

Although domestic IT service players existed, the wave of offshoring was also driven by the need to focus on core competency areas. Processes that did not significantly impact revenues were lifted, re-engineered and shifted to offshore centres in India, where "skilled" graduates delivered services. Today, IT services comprise of a mix of entrepreneurial ventures which are headquartered in India and MNCs operating via captive set-ups.

The industry (including hardware) achieved revenues of $71.7 billion in FY2009, with IT software/ services industry contributing $60 billion. During this period, direct employment was estimated at 22.3 lakh, while indirect job creation was estimated at 80 lakh. As a proportion of national GDP, the sectoral revenues have grown from 1.2% in FY1998 to an estimated 5.8% in FY2009. Export revenues grossed $47.3 billion in FY2009, accounting for 66% of industry revenues.

Despite the current financial crisis, the industry displayed resilience and tenacity in adapting to market changes and providing services to a wider set of verticals, thus reducing exposure to any one vertical.

Opportunities also existed in the form of emerging verticals such as knowledge process outsourcing, legal process outsourcing, global process outsourcing and engineering services outsourcing. Studies still indicate that India continues to be a "destination of choice", with annual cost savings estimated at $20-25 billion in 2008. It is estimated that the industry will continue to grow by about 15%, estimating a market recovery starting late FY09-10.

The road ahead
Service providers today face challenges of aligning strategies to emerging market needs, while facing increased competition (including from low-cost jurisdictions) and customer demands. Global technology related spending is expected to reduce for the first 2-3 quarters of 2009 on account of the downturn, but is expected to pick up in 2010.

Mergers and acquisitions are also expected to increase with combinations that do not require access to considerable debt -- a strong priority to establish sizable footprints in selected vertical industries and related solution offerings.

Industry players can look for a unique opportunity for growth and profitability. The result is driving movement towards an end-to-end solutions model, in which providers can deliver significant value to customers and capture a larger share of work by balancing multiple complex processes simultaneously.

Tax wish-list
It would be imperative to extend the tax holiday benefits so that India can continue its cost-arbitrage. Clarification on the mode of computing tax holiday benefits is also required.

The industry would also benefit if levy of fringe benefit tax on certain expenditures was exempted and/ or applicable rates were lowered. Moreover, taxpayers also require certainty to firm-up their group pricing policies via advance rulings in direct and indirect tax matters; it is now time to provide for an appropriate advance pricing arrangement (APA) mechanism under transfer pricing regulations along with guidance on use of data for comparability analysis, acceptance of business dynamics in pricing policies, introduction of range concept, risk adjustments, pricing for intangibles / cost contribution arrangements, etc.

Lastly, the industry is looking for clarity on taxability of customised and/ or packaged software downloads, removal of multiple levies (of service tax and VAT) on a single transaction, quicker processing of Cenvat (refund) claims (or alternatively, an exemption mechanism as available for special economic zones), clarity on service tax levy for property rentals, and guidance under customs regulations in respect of business transfer arrangements.

The author is executive director, PricewaterhouseCoopers