5 Key Expectations of the Indian IT Industry from Union Budget 2018

Narendra Modi, the Prime Minister of India, has indicated several times in the past few weeks that the upcoming union budget will not be a 'populist' one. However, this has done little to stymie the hopes of consumers and industries across a wide spectrum. In a country where hope often takes precedence over pragmatism, finance minister Arun Jaitley may well be feeling the weight of heightened expectations. And, the most vocal clamoring for sops, support, and incentives is expected from the information technology industry.

Indian IT Industry Going through a Tectonic Transformation

India’s march to a global economic powerhouse has been immensely aided by the prowess of its young workforce. However, the last couple of years have been tumultuous for the Indian IT sector, to say the least. The rising spate of protectionist policies in the U.S. and Europe, combined with the growing adoption of automation tools has put the brakes on a seemingly invincible success story. The lure of a plush IT career has received a reality check in the last one year, and it has dawned upon investors and policymakers that the sector is indeed fallible and vulnerable. It is in the backdrop of these tumultuous events that the upcoming budget assumes far more significance for this sector. Through pre-budget meetings and interactions with the media, stalwarts and spokespersons have outlined their expectations from the upcoming budget – here are the top 5 that will be highly anticipated.

1.    Incentives for Infrastructure Development

The massive transformation underway in the information technology landscape has made many traditional job roles obsolete. Automation is enabling the deployment of tools and systems that are cost-effective and quicker than a human resource. The advances in automation are likely to gain further momentum in the future, which will put more pressure on low-skilled positions. To stay relevant in this rapidly evolving landscape, a significant percentage of the IT workforce is in dire need of relearning and skill upgrading. Government stimulus will remain crucial to facilitate a transformation of this colossal scale, and the entire industry will be pinning their hopes of a favorable announcement by the finance minister.

2.    Mid-Sized Companies will Expect Support to Neutralize U.S. Tax Reforms

In a bid to promote job growth in the U.S., President Donald Trump slashed corporate tax rates from 35% to 21%. This 14% reduction in corporate tax will hurt the interests of offshore IT delivery centers, also known as 'global in-house centers' (GICs). Although the big five of the Indian IT industry – Wipro, TCS, Infosys, HCL, and Cognizant – have the budgets to see off these challenges, mid-sized companies will need government SOPs to stay competitive in the post-tax reforms landscape.

3.    Equal Tax Structure for Domestic and Foreign Startup Investors

Domestic angel investors have to pay a higher tax rate as compared to nonresident startup investors. Nasscom has been advocating a revamp of the foreign tax credit norms to alleviate the crucial disadvantage that domestic investors find themselves in. In addition to an equal tax structure, the information technology sector will also be hoping for favorable government regulations on the use of foreign tax credit. Nasscom has reiterated that the foreign tax credit provisions were drafted when India was an importer; however, as Indian IT companies become formidable exporters, the provisions need imminent modification. The industry will also be curious to know whether the finance minister agrees to the demand for carrying forward unutilized foreign taxes for a specific period of time. This provision is currently being offered by a number of developed countries, including the U.S. and Germany.

4.    GST Modifications to Reduce Operational Complexities

The IT industry feels that the current GST regulations have increased the complexities in the normal conduct of businesses. Although GST has been seen as a unifying tax model that will streamline business transactions in the country, its compatibility with the global delivery model of the IT industry has raised questions about its efficacy. Considering the peculiarities and complexities involved in an intangible serviced-based business, such as information technology, the industry will be hoping for an appropriate place of supply rules from the upcoming union budget.

5.    Startup Support: Scrapping Angel Tax and Offering MAT Exemption

The present dispensation at the helm of affairs has often reaffirmed its support for 'Make in India' and 'Digital Economy'. This has encouraged the creation of a robust startup ecosystem, with many young entrepreneurs joining the fray. However, the imposition of 'Angel' tax on startups continues to pose challenges. In addition to scrapping the Angel tax, the IT industry will also have its fingers crossed on the anticipated MAT exemption for startups.

Political observers are of the opinion that, this may well be the last full budget of the current government, as the next elections may take place in the first half of 2019. This is one reason why expectations from the government have spiked in the last couple of months. Whether electoral ambitions influence the government to lean towards a populist budget, or some bitter medicine with a long-term outlook is in the offing, remains to be seen.