Indian
IT
/
ITeS
Industry

Expiry
of
income-tax
holiday:
needs
a
re-examination
KPMG IN INDIA
 Foreword

Russell Parera Uday Ved

Chief
Executive
Officer
in
India Head
of
Tax

KPMG
in
India KPMG
in
India

The
rapid
rise
of
the
Indian
IT
/
ITeS
sector
over
the
past
decade
has
been
widely
recognized
and
reported.
Not
only
has
this
sector
performed
stupendously
well,
it
has
also
earned
India
plenty
of
acclaim
for
the
scope
and
scale
of
work
undertaken,
high
levels
of
service-quality
and
sustained
cost
competitiveness.

As
per
Nasscom
and
CRISIL,
the
IT
/
ITeS
sector
employs
about
2
million
professionals
–
making
it
the
largest
employer
in
the
organised
private
sector
of
the
country.
The
availability
of
disposable
income
has
boosted
demand
and
generated
substantial
indirect
employment.

In
addition
to
the
cost
effective
and
highly
skilled
labour
available
in
India,
the
income-tax
holiday
provided
to
the
IT
/
ITeS
companies
has
been
a
major
driving
force
behind
the
growth
of
the
sector.

Today,
there
are
multiple
challenges
before
the
sector,
ranging
from
macro
to
micro
issues
and
it
remains
to
be
seen
whether
the
sector
is
self
sustainable
and
able
to
grow
without
any
support
in
the
form
of
income-tax
holiday
under
Section
10A
/
10B
of
the
Income-tax
Act,
1961,
which
is
currently
set
to
expire
on
31
March,
2010.

KPMG,
partnering
with
CII,
has
prepared
this
discussion
note,
documenting
various
aspects
of
the
expiry
of
the
income-tax
holiday.
This
report
aims
at
giving
a
balanced
perspective
on
the
extension
of
the
income
tax
holiday,
with
the
hope
that
the
report
would
be
useful
in
terms
of
helping
the
policy
makers
come
out
with
a
suitable
proposal.

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
 S Viswanathan K R Girish
Chairman Convener
for
Economic
Affairs
and
CII,
Karnataka
Public
Policy

The
Indian
IT
/
ITeS
industry
has
come
a
long
way.
India
has
been
a
favoured
offshore
destination
for
outsourcing
IT
and
ITeS
work,
thanks
to
an
excellent
work
force
and
conducive
tax
environment—in
the
form
of
tax
holiday
benefits
given
to
this
industry
by
the
Government
of
India.
The
IT
/
ITeS
industry
has
been
enjoying
a
tax
holiday
under
the
Software
Technology
Park
of
India
(STPI)
and
Export
Oriented
Unit
(EoU)
schemes.

With
the
sunset
clause
under
the
Income-tax
Act,
1961,
restricting
the
income-tax
holiday
under
sections
10A
/
10B
(relating
to
STPIs
/
EoUs
respectively)
beyond
31
March,
2010,
the
future
of
the
Indian
IT
/
ITeS
industry
does
look
uncertain.
Is
there
a
need
for
continuation
of
the
income-tax
holiday?
Will
the
SEZ
scheme
effectively
substitute
the
expiring
income-tax
benefit
under
the
STPI/EoU
schemes?
These
are
some
of
the
questions
the
industry
is
grappling
with,
at
present.
Expiry
of
section
10A
/
10B
would
toughen
competition
for
India
vis-à-vis
other
jurisdictions.
Since
the
majority
of
the
IT
/
ITeS
industry
operates
on
a
small
or
medium
scale,
there
are
concerns
relating
to
the
effectiveness
of
the
SEZ
scheme.

CII
in
association
with
KPMG,
the
knowledge
partner,
has
prepared
a
report
on
this
issue.
This
report
reflects
the
results
of
an
independent
survey
(titled
as
‘Project
Stake’)
carried
out
on
IT
/
ITeS
companies
in
India.

This
report
aims
to
illustrate
the
concerns
currently
faced
by
the
IT
/
ITeS
industry,
in
order
to
help
policy
makers
take
the
right
measures
towards
helping
India
retain
its
competitive
edge
in
this
sector.

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
Contents
Executive Summary 01

Introduction and Overview 03

Income-tax policy on IT / ITeS Sector 09

Challenges before the IT / ITeS Sector 13

About the Survey 16

Analysis of the Survey Results 17

Conclusion 25

Comments from Industry Leaders 26

Appendix 28
- Data sources and references
- Glossary

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
 1

Executive Summary
The
Indian
IT
/
ITeS
sector
(also
referred
to
as
‘the
sector’)
is
predominantly
export
oriented,
leveraging
the
cost
arbitrage
to
deliver
solutions
and
services
to
clients.
The
growth
in
the
sector
has
been
largely
due
to
factors
such
as
high
quality
English
speaking
skilled
labour,
low
cost
base
and
increasing
advantage
accruing
from
the
learning
curve.

At
present,
the
sector
in
India
is
poised
to
become
an
epicenter
for
IT
/
ITeS
activities.
However,
the
IT
/
ITeS
sector
in
India
is
faced
with
serious
challenges
on
many
fronts
–
increasing
competition
from
other
jurisdictions,
fast
diminishing
cost
advantage
and
shortage
of
trained
talent
to
name
a
few.
So
far,
it
has
shown
resilience
and
kept
pace
with
the
estimated
growth
to
potentially
achieve
the
targets
set
out
for
2010.

However,
experts
are
skeptical
about
whether
the
sector
has
matured
enough
to
be
able
to
stand
tall
against
these
challenges
without
any
fiscal
support,
and
still
proliferate.
Even
otherwise,
there
is
still
a
long
way
to
go
as
there
is
a
huge
untapped
market.
It
is
surprising
to
note
that
India’s
IT
exports
as
a
percent
of
global
IT
spend
is
less
than
2
percent.1

Leaving
aside
the
issues
intrinsic
to
this
sector,
one
cannot
lose
sight
of
the
contribution
that
this
sector
has
made
to
the
emergence
of
India
as
an
economic
power.
In
less
than
a
decade,
the
sector’s
contribution
to
the
GDP
has
increased
manifold,
now
contributing
more
than
5
percent
of
the
GDP.
With
an
expected
export
of
USD
40
billion
in
2007-08,
the
sector
accounts
for
one
fourth
of
the
country’s
exports1.

One
of
the
reasons
for
the
emergence
of
a
new
middle
class
in
India
is
the
vast
direct
(estimated
at
2
million)
and
indirect
employment
(estimated
to
be
four
times
that
of
direct
employment)
created
by
the
sector.
No
doubt
this
has
been
a
great
thrust
to
growing
consumerism,
thus
driving
other
sectors
like
infrastructure,
real
estate,
automotives
and
the
consumer
goods
industry.

The
results
of
the
Survey
(Project
Stake)
carried
out;
clearly
reveal
that
the
sector
feels
that
there
is
still
need
for
fiscal
support
by
way
of
extension
of
the
income-
tax
holiday.
The
expiry
of
the
income
tax
holiday
is
seen
as
one
of
the
biggest
challenges
for
the
sector.

1 Nasscom data

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
2

Some
of
the
key
results
coming
out
of
the
survey
are:

• There
seems
to
be
a
consensus
amongst
the
respondents
that
the
expiry
of
the
income
tax
holiday
will
result
in
lowering
India’s
attractive
index
as
the
cost
of
doing
business
would
increase

• The
pressure
would
be
comparatively
high
on
the
small
and
medium
companies,
who
among
others,
may
not
be
able
to
effectively
leverage
the
SEZ
scheme

• Almost
two-thirds
of
the
respondents
believe
that
the
expiry
of
the
income-tax
holiday
will
have
an
adverse
impact
on
recruitments
and

• The
demand
for
an
extension
of
the
Software
Technology
Park
of
India
(STPI)
and
Export
oriented
unit
(EoU)
schemes
is
more
skewed
towards
assisting
the
small
and
medium
companies.

It
is
estimated
that
the
annual
additional
income-tax
revenue
to
the
Government
on
account
of
expiry
of
sections
10A
and
10B
of
the
Income-tax
Act,
1961
(the
Act)
would
range
between
INR
15,000
to
20,000
crores.
The
Government
therefore
would
have
to
do
a
balancing
act,
and
see
whether
this
incremental
tax
revenue
would
justify
doing
away
with
the
income-tax
holiday
all
together,
especially
given
the
fact
that
the
performance
of
this
sector
has
a
significant
effect
on
the
whole
economy.

A
well
thought
out
strategic
move
from
the
Government
can
help
the
country
maintain
the
edge
created
by
the
sector
in
the
global
market
and
position
India
as
the
leading
provider
of
IT
/
ITeS
services.

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
 3

Introduction and overview

Today,
India
is
one
of
the
five
countries
that
share
50
percent
of
the
world
Contribution to the GDP by the IT/
production.2 The
growth
story
has
been
driven
primarily
by
robust
growth
in
the
ITeS Sector ( all figures are in % )
services
sector,
and
to
a
lesser
extent,
the
manufacturing
sector.

The
most
evident
growth
has
been
observed
in
the
IT
/
ITeS
sector,
which
was
expected
to
able
to
sustain
its
growth
momentum
over
the
years.
Apart
from
the
significant
contribution
to
the
economy,
the
sector
has
also
given
birth
to
a
new
league
of
entrepreneurs,
who
have
been
successful
in
spreading
their
wings
globally,
putting
India
on
the
map
of
global
service
providers.

Some
of
the
facets
of
the
sector
have
been
discussed
in
the
following
paragraphs.
The
growing
contribution
by
the
IT/ITeS
Sector
is
clearly
visible
Size of the Sector
Source:
Nasscom
data The
sector
is
expected
to
cross
the
USD
50
billion
mark
in
2007-08.
The
projected
breakdown
for
the
verticals
is
as
below
(the
figures
exclude
the
hardware
category).

Vertical Amount in USD billion

IT
Services 31.0
BPO/
CRM
activities 12.5
Engineering
services,
R&D
and
software
products 8.5
Total 52.0

Very
clearly,
IT
services
continue
to
be
the
largest
vertical
of
business
in
the
sector.

Composition of the Sector

India
has
around
5,000
software
and
software
services
companies.
The
count
of
companies
is
skewed
towards
a
greater
number
of
small
and
medium
companies,
who
are
tussling
to
meet
the
challenges
in
increasing
their
top
line
and
the
bottom
line.
On
the
other
hand,
the
large
Indian
companies
dominate
the
market,
and
currently
contribute
around
45
percent
of
the
total
IT
exports
from
the
country.3

The
sector
has
also
been
able
to
lure
a
large
number
of
multinationals
–
captives
as
well
as
third
party
service
providers.

2 GDP on PPP basis, source:Wikipedia website

3 Nasscom and IBEF data

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
4

Export and domestic markets

After
a
long
wait,
India’s
share
in
the
world
trade
has
gone
on
an
increasing
trajectory,
and
is
expected
to
cross
2
percent
in
2008-2009.
With
the
total
exports
expected
to
be
around
USD
150
billion
for
2007-08,
if
one
were
to
go
by
press
articles,
the
Union
Ministry
of
Commerce
and
Industry
is
targeting
USD
200
billion
for
2008-09.

The
growth
in
exports
has
once
again,
been
primarily
propelled
by
the
services
sector.
Needless
to
mention,
the
Software,
Business
and
Financial
Services
sectors
have
played
a
pivotal
role
in
this
regard.

The
exports
earnings
of
the
IT
/
ITeS
sector,
for
the
FY
2007-08,
are
estimated
to
be
over
USD
40
billion,
a
growth
of
30
percent
over
the
previous
year.

Although,
exports
have
been
leading
the
growth
in
the
sector,
one
can
also
observe
a
steady
growth
in
the
domestic
market.
The
domestic
earnings
of
the
sector
in
the
FY
2007-08
are
estimated
to
be
USD
12
billion,
a
growth
of
42
percent
over
the
previous
year.

Exports from India (in USD billion )

Source:
Economic
Survey
2007-08
and
Nasscom
data

The
US
and
UK
continue
to
remain
the
largest
export
markets
with
shares
of
61
and
18
percent
respectively.
Lately,
companies
have
also
penetrated
into
other
geographies
such
as
EMEA
(i.e.
Europe,
Middle
East
and
Africa)
and
Asia
Pacific
which
show
great
potential
in
the
years
to
come.

Considering
that
the
US
is
a
dominant
market,
and
a
key
contributor
to
the
total
software
exports
of
India,
the
recessionary
trends
in
the
US
could
have
a
negative
impact
on
the
sector.
However,
despite
this,
NASSCOM
is
confident
that
the
country
will
be
able
achieve
the
USD
60
billion
export
target
by
2010.

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
 5

Markets for Indian IT/ ITeS IT / ITeS markets

exports in 2006-07 Today,
technology
has
become
a
pre-requisite
for
any
business,
and
this
can
be
observed
from
the
rapid
proliferation
of
the
services
rendered
by
the
sector.
The
Banking,
Financial
Services
and
Insurances
(BFSI)
are
the
largest
markets
for
Indian
IT
/
ITeS
exports,
with
a
share
of
40.4
percent
in
FY
2006-07.
The
next
industry
is
the
technology
/
telecom
and
manufacturing
industry
which
accounts
for
19.1
and
15
percent
respectively
of
the
IT
/
ITeS
export
market.

Industry categorisation
Indian
entrepreneurs
continue
to
lead
the
IT
services
sector,
having
a
70
percent
market
share.
On
the
other
hand,
the
BPO
sector
is
dominated
by
foreign
captives
and
foreign
service
providers
who
hold
a
share
of
around
45
percent.

Market share of the providers in IT / Product development &

Engineering segment ( 2006-07 ) USD 23 billion
Source:
Nasscom
data

Source:
Nasscom
data

Market share of the providers in the BPO segment (2006-07)

USD 8.2 billion

Source:
Nasscom
data

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
 6

Direct Employment (in million ) Employment

by the IT / ITeS Sector The
growth
of
the
IT
/
ITeS
sector
has
contributed
tremendously
to
both
the
economic
and
social
development
of
the
country.
According
to
the
Ministry
of
Labour
and
Employment,
IT
services
accounts
for
12
percent
of
India’s
total
employment,
thus
making
it
the
largest
employer
in
the
organised
private
sector.

As
per
NASSCOM-CRISIL
study,
the
direct
employment
in
the
sector
is
expected
to
touch
2
million
in
FY
2007-08,
an
increase
of
19
percent
over
the
previous
year.
The
indirect
employment
generated
is
also
impressive.
It
is
estimated
that
every
job
in
the
sector
creates
four
additional
jobs
through
an
induced
multiplier
effect.4

Source:
Nasscom
data
Mergers and Acquisitions
The
year
2007
saw
91
deals
of
private
equity
investments
in
this
sector,
by
far
the
maximum
among
all
the
sectors.5

The
following
contribute
to
the
attention
that
this
sector
is
garnering:

a) Strategic
moves
by
the
companies
for
inorganic
growth

b) Rising
global
technology
spending

c) Positive
prospects
of
the
sector
in
the
years
to
come

d) Redrawing
of
boardroom
strategies
with
respect
to
core
functions
and

risk
hedging.

4 Nasscom and CRISIL

5 Nasscom data

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
 7

Life Cycle of the Indian IT / ITeS Sector –

Where It Stands Today
Every
industry
has
a
life
cycle
and
goes
through
various
phases.
Likewise,
the
IT
/
ITeS
industry’s
trajectory
has
also
been
mapped
in
the
attached
chart.

The
shift
from
the
introduction
to
growth
phase
was
marked
with
the
off-shoring
of
low
end
and
back
office
services.
In
the
growth
phase,
the
sector
witnessed
high
growth
rates
of
over
30
percent.
With
a
good
track
record
of
delivery
of
quality
service,
the
quantity
of
off-shored
/
outsourced
work
also
saw
upward
movement.

As
the
sector
has
moved
from
the
growth
phase,
it
is
now
witnessing
increasing
competition
from
other
countries.
However,
India
still
continues
to
enjoy
the
early
mover
advantage,
as
a
result
of
which
a
large
number
of
MNCs
are
operating
in
India.

The
continued
progress
can
also
be
witnessed
with
the
incubation
of
a
large
number
of
KPOs
and
R&D
centers
in
the
country
(the
premise
of
these
industries
being
talent
arbitrage),
thus
moving
up
the
value
chain.

The
sector
is
currently
in
the
transition
mode
from
the
growth
to
the
maturity
stage.
The
following
can
be
identified
with
the
transition
phase:

• Drop
in
the
growth
rates
–
the
growth
rates
have
gradually
fallen
from

the
30
plus
mark
to
the
higher
20s,
which
is
further
expected
to
fall
to

22-24
percent
in
the
coming
years

• Upward
movement
in
the
value
chain
–
the
nature
of
services
rendered

has
also
matured.

Although,
it
would
be
a
challenging
task
to
maintain
the
present
growth
rates,
the
aim
seems
to
be
at
getting
a
bigger
share
in
the
untapped
markets
so
as
to
increase
the
share
of
Indian
companies.

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
8

Outlook
At
a
macro
level,
the
prospects
for
the
sector
appear
to
be
positive.
The
global
technology
spending
for
2007
is
estimated
to
be
USD
2,487
billion
(including
hardware),
and
is
expected
only
to
increase.
The
total
addressable
market
for
FY
2007-08
was
estimated
at
USD
250
billion
and
190
billion
for
IT-Engineering
services
and
BPO
services
respectively.6

India
holds
60
percent
and
a
38
percent
share
in
the
addressed
global
sourcing
markets
of
IT-Engineering
and
BPO
services,
respectively.6 However,
there
is
still
a
significant
untapped
market
(see
accompanying
diagrams),
which
means
that
there
is
enough
headroom
for
further
expansion
of
the
market.

The
road
ahead
might
not
be
all
that
smooth
and
the
sector
is
currently
facing
challenges
on
various
counts,
which
emanate
from
local
as
well
as
global
economic
and
political
factors.
The
recent
times
have
shown
a
clear
interdependence
between
nations.
The
recessionary
trends
in
the
US
have
already
started
having
an
adverse
impact
on
the
sector’s
growth
rates.

To
an
extent
however,
the
sector
has
hedged
itself
against
the
US
crisis
through
geographic
expansion
to
the
non-US
markets
like
EMEA
(i.e.
Europe,
Middle
East
and
Africa)
and
Asia
Pacific.
However,
one
cannot
lose
sight
of
the
fact
that
the
US
still
holds
a
lion’s
share
of
the
Indian
IT
/
ITeS
exports.

There
also
appears
to
be
a
silver
lining
in
the
middle
of
this
crisis.
There
is
one
school
of
thought
who
believes
that
pressures
on
margins
would
induce
companies
to
explore
more
opportunities
for
cost
cutting,
thereby
increasing
opportunities
for
the
Indian
IT
/
ITeS
companies.
We
have
seen
some
trends
in
the
current
year
lending
support
to
this
view.

Source:
Nasscom
data Source:
Nasscom
data

6 Nasscom data

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All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
 9

Income-tax policy on IT / ITeS Sector

The journey so far

The
Government
has
played
a
pivotal
role
in
acting
as
a
catalyst
to
the
IT
/
ITeS
sector.
The
incentives
and
SOPs
to
the
sector
have
helped
it
grow
to
its
present
size
and
stature.

The
major
milestones
relating
to
the
income-tax
incentives
have
been
identified
below.

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10

Current income-tax environment for IT/ITeS companies

Currently,
units
operating
in
the
IT
/
ITeS
sector
can
avail
income-tax
deduction
under
section
10A
/
10B
of
the
Income
tax
Act,
1961
(the
Act).
The
substance
of
both
the
sections
remains
the
same
and
these
sections
intend
to
provide
a
deduction
for
profits
generated
from
exports
of
computer
software
and
IT
/
ITeS
services.

While
section
10A
is
applicable
for
units
registered
under
the
STPI
scheme,
section
10B
applies
to
units
established
as
EoUs.

Section
10A
and
10
B
had

a
sunset
clause
of
31
March,
2009,
which
meant
that
the
deductions
under
these
sections
would
not
be
available
beyond
31
March,
2009.
Based
on
concerns
being
raised
by
the
sector,
the
Finance
Minister,
vide
the
Finance
Act,
2008,
has
extended
the
deductions
under
section
10A
and
10B
by
another
year
(i.e.
till
31
March,
2010).
However,
the
Finance
Minister
has
not
committed
to
any
further
extension
of
the
income-tax
holiday,
and
has
left
it
open.

It
would
be
relevant
to
note
that
in
any
case,
the
provisions
of
Minimum
Alternative
Tax
(MAT)
apply
to
such
companies,
even
if
they
are
eligible
to
claim
income-tax
benefits
under
section
10A
/
10B.
However,
taxes
paid
under
MAT
(currently
11.33
percent
of
the
book
profits)
can
be
claimed
as
a
credit
in
subsequent
years,
subject
to
specified
conditions.

In
the
meanwhile,
the
Special
Economic
Zones
Act,
2005
was
passed.
Accordingly,
section
10AA
was
inserted
in
the
Act
in
2006
to
provide
a
tax
holiday
for
units
operating
out
of
an
approved
Special
Economic
Zone.

The
deduction
under
section
10AA
is
available
over
a
period
of
15
years
in
the
following
manner:

• First five years –
deduction
for
100
percent
of
profits
derived
from

exports

• Next five years –
deduction
for
50
percent
of
the
profits
derived
from

exports

• Subsequent five years –
deduction
of
50
percent
of
the
profits
of

exports,
subject
to
additional
conditions
relating
to
re-investment.

MAT
provisions
are
also
not
applicable
to
an
SEZ
unit,
though
it
is
now
being
debated
by
the
Empowered
Committee
whether
such
an
exemption
should
continue.

The
SEZ
regime
(section
10AA)
has
been
dubbed
as
a
substitute
for
the
STPI
and
EoU
scheme
(section
10A
and
10B).
However,
as
discussed
subsequently
in
the
report,
owing
to
practical
reasons,
this
might
not
be
the
case.

There
seems
to
be
a
gap
between
the
vision
of
the
legislature
and
the
needs
of
the
industry.
There
is
lack
of
clarity
on
the
way
forward,
beyond
31
March,
2010,
especially
for
the
small
and
medium
enterprises,
who
do
not
have
the
financial
resources
and
face
various
challenges
to
move
to
an
SEZ.

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 11

SEZ – the Indian lap

After
its
success
in
China,
various
countries
have
tried
to
adopt
the
SEZ
model.
According
to
the
World
Bank
Report,
as
of
2007,
there
are
more
than
3,000
projects
taking
place
in
the
SEZs
in
120
countries
worldwide.

The
following
are
the
key
differences
between
the
Chinese
and
Indian
SEZ
model.

Source:
Wikipedia
and
other
publicly
available
databases

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
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12

Although,
the
SEZ
scheme
(in
India)
is
likely
to
help
augment
exports
and
develop
the
less
developed
regions
in
the
country,
the
policies
of
the
scheme
are
not
well
suited
to
the
IT
/
ITeS
sector,
which
despite
being
export
oriented
works
on
different
parameters
as
compared
to
other
industries.

Locational Restrictions Regulatory constraints Area of operations

SEZs
are
typically
located
outside
city
limits
and
impose
locational
restrictions.
This
has
serious
implications
on
manpower
mobili-
ty
and
transportation
costs.
Also
being
a
non-polluting
sector
with
little
physical
exports,
it
would
be
better
if
it
were
not
restricted
to
a
particular
location.
There
are
regulatory
constraints
on
migration
of
existing
opera-
tions
to
an
SEZ.
This
typically
makes
the
SEZs
a
viable
proposi-
tion
only
for
the
larger
compa-
nies,
who
have
large
and
growing
operations.
The
SEZ
scheme
is
more
suited
for
the
large
players.
The
guide-
lines
lay
down
a
minimum
area
requirement
of
10
hectares
(approximately
24.7
acres)
for
an
IT/
ITeS
SEZ.
Although
there
is
no
such
limit
for
an
SEZ
unit,
getting
smaller
areas
on
lease
could
be
a
challenge.

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 13

Challenges before the IT / ITeS Sector

Poor infrastructure
As
per
a
recent
survey
conducted
by
the
World
Economic
Forum,
inadequate
supply
of
infrastructure
is
the
most
problematic
factors
for
doing
business
in
India.
It
is
startling
to
note
that
India’s
internet
bandwidth
ranks
87th
as
per
the
World
Technology
Report.

The
sector
has
been
constantly
demanding
better
infrastructure
(connectivity,
housing,
electricity,
water
supply).
The
infrastructure
of
the
existing
Tier
I
and
Tier
II
cities
is
insufficient
to
match
the
exponential
growth
witnessed
in
the
sector
–
Bangalore
city,
which
boosts
to
be
the
IT
centre
of
India
is
a
classic
example.

Availability of manpower
The
sector
is
currently
caught
in
the
vicious
circle
of
constraints
in
terms
of
supply
of
trained
manpower,
high
attrition
rates
and
ever
increasing
salary
costs.

Shortage in the supply of talent

The
success
of
a
service
sector,
being
a
‘human
intensive’

sector,
highly
depends
upon
the
quality
of
the
workforce.
The
IT
/
ITeS
sector
has
so
far
galloped
on
the
back
of
talent
which
scores
high
on
quality,
innovation
and
preciseness.
This
is
one
of
the
distinct
advantages
that
India
has
over
its
competitors.

Notwithstanding,
there
are
growing
concerns
about
mismatch
of
the
talent
pool,
especially
at
the
middle
and
top
of
the
pyramid.
The
country
is
faced
with
the
largest
shortages
in
the
middle
of
the
pyramid.
The
scenario
for
the
future
does
not
seem
to
be
comforting.
As
per
NASSCOM-McKinsey
Report,2005,
there
could
be
a
shortfall
of
500,000
graduates
by
2010.

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 14

High attrition rates

Pyramid Approach
The
sector
faces
a
serious
challenge
in
attrition
rates
as
well.
Owing
to
the
gap
between
demand
and
supply,
trained
resources
are
able
to
command
higher
pay
packets,
and
frequent
switching
of
jobs
in
the
sector
seems
to
have
become
a
regular
phenomena.

The
attrition
rates
are
higher
at
the
BOP
and
MOP
levels,
and
the
larger
portion
of
the
working
population
lies
in
these
regions.

Rising wages
Increasing
employment
costs
poses
one
of
the
biggest
threats
as
this
constitutes
one
of
the
largest
proportions
of
expenses
in
the
profit
and
loss
account.
While
the
average
wage
appreciation
in
the
developing
world
is
around
5
percent,
the
corresponding
increase
in
India
is
much
higher.
If
the
trend
continues,
India
would
lose
its
cost
advantage,
making
it
less
attractive
vis-à-vis
other
emerging
destinations.

Increasing operating costs

Inflation
hovering
over
11
percent,
wage
appreciation
averaging
at
10-20
percent,
combined
with
poor
infrastructure
and
regulatory
bottlenecks,
are
purging
the
cost
advantage
India
has
been
offering.
On
the
other
hand,
the
other
emerging
locations
are
providing
SOPs,
superior
infrastructure
and
various
other
benefits
to
attract
investments
in
the
IT
/
ITeS
sector.

Instability of currency
Since
the
sector
predominantly
relies
on
export
markets,
fluctuation
in
the
value
of
Indian
Rupee
vis-à-vis
other
currencies
(especially
USD)
is
leaving
the
exporters
in
a
tussle,
and
is
having
a
negative
impact
on
the
sector.

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All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
 15

Competition from emerging destinations

India
has
been
successful
in
attaining
the
status
of
the
most
preferred
outsourcing
and
off
shoring
destination.
However,
as
the
sector
moves
from
the
‘growth’
to
the
‘maturity’
stage,
the
challenges
faced
by
the
sector
are
also
on
the
rise.

Given
below
is
a
comparison
of
the
Brazil,
Russia,
India
and
China
(BRIC)
nations
based
on
the
political,
economic,
social
factors
and
the
costs
in
each
country.
While
this
report
gives
a
comparison
of
the
BRIC
nations,
India
continues
to
have
competition
from
various
other
countries
such
as
Vietnam,
Philippines,
Malaysia
and
the
Central
and
Eastern
European
countries
that
are
opening
doors
to
the
off-shoring
and
outsourcing
business.
The
emerging
destinations
are
also
offering
various
SOPs
/
incentives,
low
cost
leverage
and
offering
holistic
development
to
attract
foreign
investment.

Source:

Economic
Intelligence
Unit,
KPMG-Nasscom
Report
on
Emerging
Destinations
and
other
publicly
available
data.

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
16

About the Survey

KPMG
and
CII
conducted
this
survey
with
the
primary
objective
of
providing
a
balanced
perspective
of
the
sector,
specifically
on
the
economic
implications
of
the
expiry
of
the
income-tax
holiday.
The
views
are
based
on
an
analysis
of
the
feedback
received
from
the
respondents
and
on
the
basis
of
the
information
collected
via
secondary
data
analysis.

For
the
purpose
of
the
survey,
a
questionnaire
containing
25
questions
was
sent
out
to
respondents
from
the
IT
/
ITeS
sector
across
the
country.

The
respondents
to
the
survey
represent
a
mix
of
small,
medium
and
large
companies,
operating
across
segments
like
IT,
ITeS,
R&D
etc.

For
the
purpose
of
the
analysis,
companies
have
been
segregated
on
the
following
basis:

a) Companies
with
turnover
less
than
INR
100
crores
–
have
been

categorised
as
small
companies

b) Companies
with
turnover
between
INR
100
crores
and
INR
1000
crores
–
have
been
categorised
as
medium
size
companies

c) Companies
with
turnover
more
than
INR
1000
crores
–
have
been

considered
as
large
companies.

Small
and
medium
companies
have
been
referred
to
as
SME
segment.

Profile of the respondents

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

Analysis of the survey results
Percentage of respondents identifying
the various factors as their first choice
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17
Pervasiveness of the STPI / EoU regime
The
responses
show
that
a
significant
portion
(88
percent)
of
the
companies
in
the
sector
is
availing
the
income-tax
holiday
available
under
the
STPI
/
EoU
regime.

Registered
Not registered with
Particulars under STPI /
STPI /EoU scheme
EoU scheme
Companies
enjoying
income-tax
88 Not
Applicable
benefits
under
Section
10A
/
10B
Companies
not
enjoying
income-
tax
benefits
under
Section
10A
/ 7 5
10B
Very
clearly,
the
income-tax
holiday
under
section
10A
/
10B
is
relevant
for
a
large
section
of
the
sector,
and
the
sunset
of
these
sections
would
have
a
severe
impact
on
the
profitability.
Biggest contributor to the success of the IT / ITeS Sector
The
success
story
of
the
sector
can
be
attributed
to
various
factors
such
as
availability
of
a
rich
talent
pool,
availability
of
the
tax
holiday,
relatively
lower
costs
and
entrepreneurial
skills.
Through
the
survey,
we
have
tried
to
map
out
the
relative
contribution
of
these
factors.

Forty
two
percent
of
the
respondents
believe
that
the
talent
pool
has
played
the
most
important
role
in
taking
the
sector
where
it
stands
today.
The
low
cost
leverage
the
country
offers
ranks
second
–
32
percent
of
the
respondents
have
identified
low
costs
as
being
the
biggest
contributor
to
the
success
of
the
sector.
The
income-tax
concessions
availed
by
the
companies
is
the
third
most
preferred
choice,
with
23
percent
of
the
respondents
choosing
it
is
as
the
reason
for
the
success
of
this
sector
and
being
chosen
as
the
most
preferred
destination.

 18

Percentage of respondents identifying

the various factors as the first choice
Biggest
challenge
to
the
IT/
ITeS
Sector

Biggest challenge for the IT / ITeS Sector
The
year
2007
was
marked
with
numerous
challenges
for
the
IT
/
ITeS
sector.
The
US
slow
down
(which
has
had
an
impact
on
the
global
technology
spending),
fluctuation
of
the
rupee,
rising
wages
and
operating
costs,
coupled
with
talent
supply
constraints,
have
tested
the
resilience
of
the
sector.

One
of
the
sector’s
biggest
bug
bears
has
been
the
expiry
of
the
income-tax
holiday,
which
was
proposed
to
expire
on
31
March,
2009.
After
much
debate,
the
Finance
Minister
has
extended
the
scheme
by
another
year,
and
it
would
now
be
expiring
on
31
March,
2010.
This
has
come
as
a
breather,
especially
to
the
small
and
medium
companies
in
the
sector,
who
constantly
face
challenges
and
for
whom
the
SEZ
regime
does
not
appear
to
be
a
practical
solution.

Thirty
two
percent
of
the
respondents
believe
that
the
expiry
of
the
income-tax
holiday
under
section
10A
/
10B
is
the
biggest
challenge
for
the
sector
today.
Twenty
five
percent
of
the
respondents
have
opted
for
rising
costs
as
the
biggest
challenge.

It
is
interesting
to
note
that
respondents
representing
the
larger
companies
have
identified
availability
of
trained
manpower
as
the
biggest
challenge.
Clearly,
it
would
seem
that
since
these
companies
have
the
financial
strength
to
move
to
an
SEZ
location,
expiry
of
the
benefit
under
section
10A
/
10B
seems
to
be
of
a
lesser
concern.

Recruitments and compensation levels

The
sector
has
been
instrumental
in
the
emergence
of
a
new
middle
class
through
the
creation
of
enormous
job
opportunities.
The
sector
has
also
utilised
the
potential
of
India’s
vast
population.

A
majority
of
the
respondents
believe
that
the
withdrawal
of
the
income-tax
holiday
will
burden
the
recruitment
and
compensation
levels.
A
slowdown
on
the
recruitment
could
have
a
larger
economic
impact
as
the
growth
in
the
sector
has,
inter alia,
been
a
stimulus
for
the
growing
consumerism
(demand),
increasing
thrust
on
infrastructure
and
driving
the
real
estate,
automotive
and
consumer
goods
industry.

Sixty
six
percent
of
the
respondents
believe
that
the
expiry
of
the
income-
tax
holiday
will
have
an
adverse
impact
on
recruitments.
Many
respondents
from
the
large
compa-
nies
said
that
the
industry
would
go
slow
on
recruitments.
Ninety
two
percent
of
the
respon-
dents
are
of
the
view
that
the
sector
would
be
unable
to
maintain
the
increases
in
the
compensation
levels.
All
respondents
from
the
large
com-
panies
have
also
taken
this
view.

Majority
of
the
respondents
repre-
senting
R&D
companies
have
also
chosen
that
the
impact
would
be
felt
on
both,
recruitments
and
the
com-
pensation
levels.

Sixty
seven
percent
of
the
respon-
dents
representing
MNCs
also
believe
that
the
sector
would
go
slow
on
recruitments
and
90
percent
also
consider
sustaining
compensa-
tion
levels
to
be
a
greater
challenge.

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 19

Pricing
The
withdrawal
of
the
income-tax
holiday
will
force
companies
to
revisit
their
pricing
strategies.
This
view
is
also
supported
by
90
percent
of
the
respondents.

Fifty
percent
of
the
respondents
representing
captive
service
providers
are
of
the
view
that
the
expiry
of
the
income-tax
holiday
would
lead
to
an
overall
increase
in
the
cost
of
doing
business.
The
aim
of
most
outsourcing
and
off-shoring
is
to
enjoy
the
cost
leverage
that
a
jurisdiction
can
offer.
It
is
a
no
brainer
that
with
a
potential
overall
increase
in
the
cost
of
doing
business
in
India,
the
India
attractiveness
index
would
most
likely
suffer.

Most affected segment

Seventy
seven
percent
of
the
respondents
have
evinced
that
the
small
and
medium
companies
would
be
most
affected
with
the
withdrawal
of
the
income-
tax
holiday.

The
success
of
the
STPI
/
EoU
scheme
is
not
solely
based
on
the
income-tax
incentives
provided
to
the
sector,
but
also
the
ease
with
which
the
companies
have
been
able
to
carry
on
operations
owing
to
minimum
regulatory
and
locational
constraints.
While
SEZ
may
be
an
effective
model
to
stimulate
the
country’s
exports,
income-tax
incentives
provided
by
this
scheme
are
not
the
only
reason,
but
the
ease
of
operating
also
plays
an
important
role.

Doing
away
with
the
tax
holiday
could
potentially
widen
the
competitive
gap
between
the
SMEs
and
the
larger
companies
in
the
sector.
Eighty
nine
percent
of
the
respondents
also
believe
the
same,
and
what
is
interesting
to
note
is
that
this
view
is
also
shared
by
all
the
respondents
from
the
larger
companies.

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20

India vs other emerging destinations

Although
India
is
today
considered
to
a
preferred
destination,
only
around
250
out
of
500
Fortune
companies
are
clients
of
the
sector.
There
is
a
huge
untapped
market
which
is
yet
to
be
explored.
Other
jurisdictions
have
already
come
up
to
speed
on
making
their
presence
felt
in
this
space.
These
countries
are
offering
various
incentives
for
setting
up
the
units
with
a
well
laid
infrastructure.
A
large
number
of
IT
/
ITeS
companies
(both
Indian
and
foreign)
are
already
operating
in
countries
like
China,
Malaysia,
Canada,
Brazil
and
Hungary.

Other
emerging
destinations
such
as
Vietnam,
Philippines
and
Brazil
are
also
making
their
countries
viable
for
off-shoring
and
outsourcing
of
business.
Besides
offering
various
incentives,
other
measures
are
being
taken
to
improve
the
education,
IT
and
social
infrastructure
in
these
countries.

• Eighty
two
percent
of
the
respondents
are
of
the
opinion
that
withdrawal
of
the
income-tax
holiday
would
result
in
additional
pressure
on
India.
The
country
will
find
it
difficult
to
compete
with
other
emerging
destinations

like
Vietnam,
Philippines,
Romania
and
East
European
countries

• Eighty
four
percent
of
the
respondents
from
MNCs
are
of
the
view
that

India
would
lose
its
edge
over
other
competing
destinations

• Considering
that
the
R&D
companies
would
focus
more
on
talent

arbitrage
rather
than
cost
arbitrage,
one
would
have
expected
that
the

responses
from
the
R&D
companies
would
be
different.
However,
a

significant
portion
of
the
responses
from
R&D
companies
has
also

followed
the
same
trend,
and
is
of
the
view
that
the
withdrawal
of
the

income-tax
holiday
may
force
companies
to
look
at
other
locations.

It
seems
that
the
withdrawal
of
the
income-tax
holiday
is
definitely
going
to
add
one
more
area
of
concern
for
the
sector,
and
India
may
find
it
difficult
to
retain
its
attractiveness
with
the
MNCs.

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 21

Is the SEZ an effective substitute to benefit all segments of

the sector?
The
success
of
the
STPI
model
is
clearly
visible
with
the
increase
in
the
number
of
registered
STPI
units.

Increase in the number of STPI units (operating units only)

Units as on March 2001 Units as on March 2007

2,895 6,321

Source:

STPI
Annual
Report
(2004-05)
and
Annual
Report
on
Information
Technology
by
the
Ministry
of
Communications
and
Information
Technology
(2007-08)

The
SEZ
has
been
envisaged
as
an
effective
model
that
would
further
boost
the
exports
of
the
country
with
globally
competitive
infrastructure
and
better
utilization
of
resources.
However,
many
are
of
the
view
that
the
model
supports
only
the
larger
companies
in
the
sector.
As
per
the
Survey,
73
percent
of
the
respondents
have
said
that
the
model
will
benefit
only
the
larger
companies.
Further,
78
percent
of
the
respondents
are
of
the
view
that
the
SEZ
scheme
is
not
an
effective
substitute
for
withdrawal
of
the
STPI
Scheme.

Although
the
larger
enterprises
are
better
suited
to
avail
the
benefits
offered
by
the
scheme,
many
of
the
large
companies
also
consider
the
SEZ
Scheme
to
be
an
ineffective
substitute
to
the
existing
STPI
regime.

Respondents view on the segments most benefitted with the
SEZ policy

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22

Will the SEZ result in full capacity addition?

An
interesting
issue
relating
to
the
SEZ
scheme
is
whether
it
would
result
in
a
100
percent
new
capacity
build
up,
or
there
will
it
affect
the
capacities
already
built
under
the
non-SEZ
schemes.
One
should
bear
in
mind
that
any
migration
of
work
from
the
existing
capacities
to
the
SEZs
may
impact
the
utility
of
existing
capacities.

The
response
from
the
Survey
does
not
seem
to
be
very
convincing
on
this
point.
Eighty
seven
percent
of
the
respondents
believe
that
due
to
commercial
and
practical
reasons,
there
will
be
diversion
of
business
from
the
existing
capacities
to
the
SEZ
units
(significant
or
otherwise).
This
may
render
the
existing
capacities
redundant.

Biggest challenge relating to the SEZ scheme

SEZ
requires
large
scale
operations
to
enjoy
economies
of
scale.
Twenty
seven
percent
of
the
respondents
have
selected
the
requirement
relating
to
the
scale
of
operations
as
the
biggest
difficulty
with
the
scheme.
An
equal
percent
of
the
respondents
have
cited
regulatory
constraints
as
the
biggest
challenge.

Regulatory constraints and scale of operations are biggest

challenges of the SEZ policy

Percentage
of
respondents
considering
the
various
factors
as
the
biggest
challenge
under
the
SEZ
regime

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 23

What lies ahead – Strategies to retain margins

With
increasing
competition,
global
slow
down,
rising
wages
and
currency
fluctuation,
companies
are
already
finding
it
difficult
to
retain
their
existing
margins.
The
respondents
were
asked
on
what
strategies
companies
would
look
at
for
maintaining
their
margins.

A
large
chunk
of
the
respondents
have
indicated
that
companies
would
need
to
introspect,
and
work
towards
increasing
the
productivity
and
re-engineering
processes.

In
fact,
companies
today
are
working
towards
increasing
their
utilisation
rates
and
have
resorted
to
cost
optimisation.

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24

Fiscal support
A
whopping
97
percent
of
the
respondents
believe
that
the
income-tax
holiday
should
be
extended
further.
However,
it
would
be
interesting
to
note
that
only
34
percent
respondents
are
of
the
view
that
all
segments
(in
terms
of
size)
of
the
sector
would
need
fiscal
support.
The
other
63
percent
of
the
respondents
are
of
the
opinion
that
the
income-tax
holiday
should
be
extended
for
the
SME
segment
only.

It
is
clear
that
the
responses
have
been
balanced
in
so
far
as
they
emphasize
on
the
need
to
support
the
smaller
and
medium
companies
to
help
them
go
to
the
next
level.

Respondents view on extending the fiscal support for 5 and 10 years

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 25

Conclusion
The
results
of
the
survey
give
a
good
insider’s
views
on
the It
is
estimated
that
the
annual
additional
income-tax
revenue
matter.
The
respondents
seem
to
believe
that
the
sunset to
the
Government
on
account
of
expiry
of
sections
10A
/
clause
of
the
section
10A
/
10B
may
put
the
sector
on
the 10B
would
range
between
INR
15,000
to
20,000
crores7.


back
foot,
especially
with
reference
to
segments
where
the
The
Government
will
definitely
have
to
weigh
this
revenue
country
is
in
competition
with
other
jurisdictions.
There
is
a
sacrifice
vis-à-vis
the
larger
economic
benefits.
Given
the
consensus
on
the
need
for
continuing
fiscal
support,
and
an
sheer
scale
of
employment
and
disposable
income
extension
of
the
income-tax
holiday
under
section
10A
/
10B.
generated,
any
slowdown
or
a
negative
impact
on
the
sector
The
results
of
this
survey
establish
beyond
doubt
why
the
will
also
have
a
far
reaching
effect
on
a
consumer
lead
issue
of
expiry
of
the
income-tax
holiday
has
emerged
as
the
economy
for
the
other
sectors.
single
biggest
challenge
for
the
sector.
Though
one
may
claim
that
the
sector
has
been
seeing
Some
of
the
takeaways
from
the
survey
are:
exorbitant
growth
rates
and
is
well
positioned
to
function
• India’s
attractive
index
would
be
adversely
impacted even
without
a
tax
holiday
benefit,
the
need
of
the
hour
is
to
as
the
cost
of
doing
business
would
increase ensure
that
the
sector
continues
to
grow
and
capture
the
untapped
markets.
With
growing
competition,
and
increasing
• The
pressure
would
be
higher
on
the
small
and

complexity
in
operations,
the
country
needs
to
ensure
that
it
medium
companies,
who
among
others,
may
not

does
not
lose
its
competitive
edge.
be
able
to
effectively
leverage
the
SEZ
scheme

• Almost
two-thirds
of
the
respondents
believe
that

the
expiry
of
the
income-tax
holiday
will
have
an

adverse
impact
on
recruitments

• The
demand
for
an
extension
of
the
STPI
/
EoU

schemes
is
clearly
in
favor
of
assisting
the
small

and
medium
companies.

7 Computed subject to assumptions and using/ extrapolating data of NASSCOM and other sources. It
has been assumed that the tax rate would be constant at 34 percent.

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 26
Comments from some industry leaders8
Mr. Suresh C Senapaty,
Executive Director and
Chief Financial Officer,
Wipro Limited.
Issue: Do
you
believe
that
the
Indian
IT
/
ITeS
industry
“
needs
further
fiscal
support
in
the
form
of
an
extension
of
the
income-tax
holiday
benefits
under
section
10A
/
10B
of
the
Income-tax
Act?
Comments: Yes.
The
Indian
IT
industry
has
substantial
operations
by
way
of
on-site
development
of
computer
software
in
respect
of
which
substantial
corporate
taxes
are
incurred
in
foreign
countries.
Further,
social
security
costs
are
incurred
in
foreign
countries
for
employees
working
on-
site,
which
is
a
sunk
cost
without
any
benefit
accruing
to
the
employees.
In
the
absence
of
an
effective
foreign
tax
credit
mechanism
and
Totalisation
Agreements,
the
tax
cost
for
Indian
IT
industry
is
inherently
high.
In
the
absence
of
fiscal
support
such
as
section
10A
/
10B,
the
Indian
IT
industry
will
suffer
an
ETR
higher
than
other
industries
(which
is
estimated
to
be
around
20
percent).
The
Indian
IT
&
ITeS
industry
generates
huge
employment
that
is
directly
proportional
to
the
volume
of
business.
Fiscal
incentives
help
in
sustaining
growth
and
therefore
employment.
Capital
intensive
industries
get
fiscal
incentive
by
way
of
depreciation
for
building
capacity
and
also
lower
the
tax
costs
by
employing
an
optimal
debt:
equity
capital
structure.
In
the
case
of
IT
and
ITeS,
owing
to
the
nature
of
business,
use
of
debts
for
operations
has
limited
scope.
The
capacity
for
IT
/
ITeS
is
built
through
employment
and
the
incentive
is
by
way
of
section
10A
/
10B.
While
the
maximum
marginal
rate
for
companies
is
34
percent,
the
average
effective
tax
rate
is
20
percent,
which
means
that
all
industries
enjoy
tax
incentives
in
one
form
or
the
other.
Section
10A
/
10B
deduction
for
IT
/
ITeS
is
logical
to
maintain
parity
with
other
industries
considering
that
it
pre-dominantly
competes
in
global
markets.
The
dividend
distributed
by
Corporates
engaged
in
IT
/
ITeS
as
a
proportion
of
net
profits
is
significant,
which
means
a
higher
pay-out
of
dividend
distribution
tax,
which
is
at
17
© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
percent.
This
rate
of
taxation
on
dividends
is
almost
equal
to
the
ETR
of
most
corporates
at
20
percent.
Thus,
while
Section
10A
/
10B
is
seen
as
an
incentive,
all
the
above
factors
ensure
that
the
aggregate
tax
paid
by
IT
/
ITeS
is
on
par
with
most
companies
and
withdrawal
would
mean
imposing
a
higher
than
average
tax
on
IT
/
ITeS
companies.
Issue: If
the
answer
to
the
above
is
a
‘no’,
do
you
believe
that
the
SEZ
scheme
is
an
effective
substitute
for
the
STPI
/
EoU
regime?

Comments: SEZ
benefits
are
not
specific
to
IT
/
ITeS.
SEZ
as
a
concept
is
intended
to
promote
capital
formation,
generate
employment
and
promote
exports.
These
objectives
are
significantly
advanced
by
IT
/
ITeS
sector.
Issue: What
impact
or
trend
do
you
expect
to
see
in
the
headcount
and
compensation
levels
of
the
sector
after
the
expiry
of
the
income-tax
holiday?
Comments: Once
tax
incentives
are
withdrawn,
businesses
engaged
in
IT
/
ITeS
will
generate
lower
internal
resources.
Obviously,
it
will
be
an
impediment
to
growth,
which
will
be
followed
by
lower
compensation
and
a
lower
generation
of
employment.
In
relative
terms,
the
quantum
of
income
in
the
hands
of
employees
which
suffers
tax
at
the
maximum
marginal
rate
of
34
percent
will
decline,
which
means
that
the
tax
revenues
collected
from
the
Corporates
engaged
in
IT
/
ITeS
will
be
more
than
offset
by
a
lower
collection
from
the
employees
who
are
engaged
by
the
Indian
IT
/
ITeS
industry.
Issue: India
has
thus
far,
been
a
preferred
offshore
destination.
Do
you
believe
that
this
will
have
an
impact
on
the
attractiveness
index
of
India?

Comments: The
attractiveness
index
of
India
for
ITeS
could
decline
as
the
skill
sets
are
usually
found
in
other
destinations,
which
may
attract
investments
through
fiscal
incentives.
Indian
IT
services
are
capable
of
moving
up
the
value
chain
and
hence
India
will
continue
to
be
a
preferred
destination.
Issue: If
so,
do
you
believe
that
any
additional
investment
in
this
sector
would
go
to
other
locations
such
as
Vietnam,
Romania,
Philippines
or
Eastern
Europe?


Comments: ITeS
investment
could
go
to
these
destinations.
 27

Mr. Rostow Ravanan, Mr. Alok C. Misra,

Chief Financial Officer, Group CFO,
MindTree Limited. WNS Global Services.

Issue: Do
you
believe
that
the
Indian
IT
/
ITeS
industry Issue: Do
you
believe
that
the
Indian
IT
/
ITeS
industry

“
needs
further
fiscal
support
in
the
form
of
an
extension
of needs
further
fiscal
support
in
the
form
of
an
extension
of
the
the
income-tax
holiday
benefits
under
section
10A
/
10B
of income-tax
holiday
benefits
under
section
10A
/
10B
of
the
the
Income-tax
Act? Income-tax
Act?

Comments: Yes.
The
industry
is
facing
multiple Comments: Yes

headwinds
and
needs
additional
tax
support.
Issue: What
impact
or
trend
do
you
expect
to
see
in
the
Issue: If
the
answer
to
the
above
is
a
‘no’,
do
you headcount
and
compensation
levels
of
the
sector
after
the
believe
that
the
SEZ
scheme
is
an
effective
substitute
for expiry
of
the
income-tax
holiday?
the
STPI
/
EoU
regime?

Comments: Although
the
sector
will
continue
to
grow
Comments: I
have
answered
the
previous
question but
the
growth
rate
may
not
be
at
the
same
pace
as
has
been
as
yes.

In
any
case,
the
SEZ
scheme
is
not
an
effective for
last
ten
years
or
so,
hence
it
will
have
consequential
replacement
to
the
STPI
scheme. impact
on
the
headcount
and
compensation
growth.

Issue: What
impact
or
trend
do
you
expect
to
see
in
the Issue: India
has
so
long
been
a
preferred
offshore

headcount
and
compensation
levels
of
the
sector
after
the destination.
Do
you
believe
that
this
will
have
an
impact
on
expiry
of
the
income-tax
holiday? the
attractiveness
index
of
India?

Comments: Will
lead
to
a
slowdown
in
recruitment Comments: The
attractiveness
index
of
India
is
already

and
slowdown
in
the
annual
wage
increases. impacted
due
to
poor
infrastructure
and
ambiguous
tax
laws
/

Issue: India
has
so
long
been
a
preferred
offshore govt.
policies.
Removal
of
this
tax
holiday
will
definitely
have
a

further
negative
impact.
destination.
Do
you
believe
that
this
will
have
an
impact
on
the
attractiveness
index
of
India?
Issue: If
so,
do
you
believe
that
any
additional
investment

Comments: Definitely.
IT
companies
will
grow
their in
this
sector
would
go
to
other
locations
such
as
Vietnam,

Romania,
Philippines
or
Eastern
Europe?


presence
in
other
countries.
MNCs
who
were
setting
up
shop
in
India
will
also
look
at
other
countries
to
invest
in. Comments: Yes
this
process
has
already
started
and

Issue: If
so,
do
you
believe
that
any
additional
escalates
as
the
sunset
on
tax
holiday
comes.

investment
in
this
sector
would
go
to
other
locations
such
as
Vietnam,
Romania,
Philippines
or
Eastern
Europe?

Comments: Yes

8 Wipro Limited, MindTree Limited, and WNS Global Services are separate and distinct from KPMG
International and its member firms. The views and opinions are those of the authors and do not nec-
essarily represent the views and opinions of KPMG

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
28

Data sources and references

• Economist
Intelligence
Unit
website

• Nasscom:
Strategic
Review
2008

• Emerging
Destinations
for
Indian
IT
/
ITeS
Industry
–
India:
KPMG

NASSCOM

• NASSCOM
website

• STPI
website

• SEZ
website

• IBEF
website

• World
Economic
Forum
website

• Wikipedia
website

• Information
Technology
–
Annual
Report
2007-08,
Ministry
of

Communications
&
Information
Technology

• Other
Publicly
available
data

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
 29

Glossary

BFSI: Banking,
Financial
Services
and
Insurance
BOP: Bottom
of
Pyramid
BPO: Business
Process
Outsourcing
BRIC: Brazil,
Russia,
India
and
China
CRISIL: Credit
Rating
Information
Services
of
India
Limited
CRM: Customer
Relationship
Management

EHTP: Electronic
Hardware
Technology
Park
EIU: Economist
Intelligence
Unit
EoU: Export
Oriented
Units
EPZ: Export
Processing
Zone
FICCI: Federation
of
Indian
Chambers
of
Commerce
and
Industry
FY: Financial
Year

GDP: Gross
Domestic
Product
IT: Information
Technology
ITeS: Information
Technology
Enabled
Services
KPO: Knowledge
Processing
Outsourcing
MAT: Minimum
Alternative
Tax
M&A: Mergers
and
Acquisitions
MOP: Middle
of
Pyramid
NASSCOM: National
Association
for
Software
and
Services
Company
R&D: Research
and
Development
SEZ: Special
Economic
Zone
SOPs: Soft
Operating
Policies
SME: Small
and
Medium
Enterprises
STPI: Software
Technology
Parks
of
India
TOP: Top
of
Pyramid
USD: United
States
Dollar

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
 30

About Confederation of Indian Industry (CII)

The
Confederation
of
Indian
Industry
(CII)
works
to
create
and
sustain
an
environment
conducive
to
the
growth
of
industry
in
India,
partnering
industry
and
government
alike
through
advisory
and
consultative
processes.

CII
is
a
non-government,
not-for-profit,
industry
led
and
industry
managed
organisation,
playing
a
proactive
role
in
India’s
development
process.
Founded
over
112
years
ago,
it
is
India’s
premier
business
association,
with
a
direct
membership
of
over
7000
organisations
from
the
private
as
well
as
public
sectors,
including
SMEs
and
MNCs,
and
an
indirect
membership
of
over
90,000
companies
from
around
362
national
and
regional
sectoral
associations.

A
facilitator,
CII
catalyses
change
by
working
closely
with
government
on
policy
issues,
enhancing
efficiency,
competitiveness
and
expanding
business
opportunities
for
industry
through
a
range
of
specialised
services
and
global
linkages.
It
also
provides
a
platform
for
sectoral
consensus
building
and
networking.
Major
emphasis
is
laid
on
projecting
a
positive
image
of
business,
assisting
industry
to
identify
and
execute
corporate
citizenship
programmes.
Partnerships
with
over
120
NGOs
across
the
country
carry
forward
our
initiatives
in
integrated
and
inclusive
development,
which
include
health,
education,
livelihood,
diversity
management,
skill
development
and
water,
to
name
a
few.

Complementing
this
vision,
CII's
theme
"India@75:
The
Emerging
Agenda",
reflects
its
aspirational
role
to
facilitate
the
acceleration
in
India's
transformation
into
an
economically
vital,
technologically
innovative,
socially
and
ethically
vibrant
global
leader
by
year
2022.

With
64
offices
in
India,
8
overseas
in
Australia,
Austria,
China,
France,
Japan,
Singapore,
UK,
USA
and
institutional
partnerships
with
271
counterpart
organisations
in
100
countries,
CII
serves
as
a
reference
point
for
Indian
industry
and
the
international
business
community.

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
 31

About KPMG in India

KPMG
is
the
global
network
of
professional
services
firms
of
KPMG
International.
Our
member
firms
provide
audit,
tax
and
advisory
services
through
industry
focused,
talented
professionals
who
deliver
value
for
the
benefit
of
their
clients
and
communities.
With
nearly
123,000
people
worldwide,
KPMG
member
firms
provide
services
in
145
countries.

The
member
firms
of
KPMG
International
in
India
were
established
in
September
1993.
As
members
of
a
cohesive
business
unit,
they
respond
to
a
client
service
environment
by
leveraging
the
resources
of
a
global
network
of
firms,
providing
detailed
knowledge
of
local
laws,
regulations,
markets
and
competition.
We
provide
services
to
over
2,000
international
and
national
clients,
in
India.
KPMG
has
offices
in
India
in
Mumbai,
Delhi,
Bangalore,
Chennai,
Hyderabad,
Kolkata
and
Pune.
The
firms
in
India
have
access
to
more
than
2000
Indian
and
expatriate
professionals,
many
of
whom
are
internationally
trained.
We
strive
to
provide
rapid,
performance-based,
industry-focused
and
technology-enabled
services,
which
reflect
a
shared
knowledge
of
global
and
local
industries
and
our
experience
of
the
Indian
business
environment.

© 2008 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.
All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
 in.kpmg.com

KPMG
in
India KPMG
Contact
Uday Ved
Mumbai
Head - Tax
KPMG House, Kamala Mills Compound
Tel: +91 (22) 3983 5933
448, Senapati Bapat Marg
e-Mail: uved@kpmg.com
Lower Parel
Mumbai 400 013
Pradip Kanakia
Tel: +91 22 3989 6000
Executive Director
Fax: +91 22 3983 6000
Head - Markets
e-Mail: pkanakia@kpmg.com
Delhi
Tel: +91 80 3980 6100
4B, DLF Corporate Park
DLF City, Phase III
Gurgaon 122 002
Tel: +91 124 307 4000 CII
Contact
Fax: +91 124 254 9101
Confederation of Indian Industry
Pune No.1086, 12th Main, HAL 2nd Stage
703, Godrej Castlemaine Indiranagar, Bangalore 560 008
Bund Garden Tel: 80-2527 6544 (8 lines)
Pune 411 001 Fax: 91-80-2527 6709
Tel: +91 20 3058 5764/65 Website: www.cii.in
Fax: +91 20 3058 5775

Bangalore
Maruthi Info-Tech Centre
11-12/1, Inner Ring Road
Koramangala
Bangalore 560 071
Tel: +91 80 3980 6000
Fax: +91 80 3980 6999

Chennai
No.10 Mahatma Gandhi Road
Nungambakkam
Chennai 600 034
Tel: +91 44 3914 5000
Fax: +91 44 3914 5999

Hyderabad
8-2-618/2
Reliance Humsafar, 4th Floor
Road No.11, Banjara Hills
Hyderabad - 500 034
Tel: +91 40 6630 5000
Fax: +91 40 6630 5299

Kolkata
Park Plaza, Block F, Floor 6
71 Park Street
Kolkata 700 016
Tel: +91 33 2217 2858
Fax: +91 33 2217 2868

©
2008
KPMG,
an
Indian
Partnership
and
a
member
firm
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herein
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intended
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or
entity.
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a
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