With the value proposition of offshore development being well established, global companies are increasingly outsourcing to India, and this promises a bright future for the Indian software sector as a whole.

The fact that India's share in the global software and services industry is barely in low single digits (around 3%) provides the Indian IT sector with huge potential to grow going forward.

A greater focus on higher-end services and products, greater domain expertise and a partnership approach with clients are expected to be the key growth drivers for the industry going forward.

Budget Measures Excise duty of 12% imposed on computers. Excise duty of 8% imposed on over-the-counter (OTC) packaged software, excluding software downloaded from the internet and customised software. Excise duty on DVD drives reduced to nil. Duty on clearances to Domestic Tariff Area from Export Oriented Units or units in Electronic Hardware Technology Parks, Software Technology Parks etc. is being changed from 50% of the aggregate of customs duties to 25% of basic customs duty plus full CV duty. For the purpose of fringe benefits tax (FBT), valuing the benefit in the form of 'tour and travel' at 5% instead of 20%. The service tax has been increased from 10% to 12%.  Budget Impact The excise duty of 12% levied on computers will not have any impact on computer makers, which will be able to take full input tax (CENVAT) credit for the excise duty paid. The end-product prices are not expected to change. The excise duty of 8% imposed on OTC packaged software will have a marginal impact on software companies like Infosys [Get Quote], which purchase packaged software. The reduction in excise duty on DVD drives to nil is a positive for companies like Moser Baer [Get Quote], which is a major manufacturer. The FBT measure will not have any major impact on the software industry, for which the impact of the FBT is anyways very marginal at anywhere between 0.5% and 1% of profit before tax (PBT).  Sector Outlook India is estimated to have 65% of the global offshore IT services market and 46% of the BPO market. Given the fact that all countries together have tapped just 10% of the addressable market, there is tremendous scope for growth. In particular, BPO services and higher-end IT services will be the next growth drivers for the industry, and companies which are steadily moving up the value chain will benefit. Companies having a scalable business model, operating in niche areas requiring a higher level of skills, and which are steadily building competencies in providing high-end business solutions to their clients are expected to corner the gains from this growth. Given the fact that India remains as the premier destination for offshore outsourcing, we expect the Indian IT industry in general and top-tier software companies in particular, to benefit over the longer term.  Industry Wish List NASSCOM Wish List Review the definition of export turnover in the context of the IT sector. Review foreign tax credit policy and make it simpler and faster. Discourage taxation of parent companies abroad. Treat the IT and BPO sectors uniformly for taxation (especially Fringe Benefit Tax) purposes. Broaden the scope of CENVAT credit for common input services. Amend the IT/Customs/Excise laws in order to enable ITES/software units to share infrastructure, such as servers and data, in order to enable operating efficiency. Mr. Kapil Kapur, DGM - Finance & Investor Relations, HCL Infosystems [Get Quote] Rationalise existing excise duties in order to encourage local manufacturing, which includes not just assembling personal computers (PCs), but also putting together components like motherboards. Mr. Amar Chintopanth, CFO, 3i Infotech The tax holiday schemes should be reviewed. The concessions given to software exports from special economic zones (SEZs) should be extended to software technology parks (STPs). This will play an important role in the future planning of software companies, since the STP scheme is coming to a close in 2009.  Budget over the years Budget 2003-04 Budget 2004-05 Budget 2005-06 Benefits under Section 10A/10B for IT companies to continue. IT companies will continue to enjoy the benefits of 10A/10B benefits even after a change of management. Pre-loaded software in computers to be exempt from excise duty. Limit on overseas investments for companies increased from 50% of networth to 100%. Full excise exemption on computers (from 8% earlier). Bill for regulating Special Economic Zones (SEZs) to be introduced. Prepare an Investment Commission to facilitate investments (both domestic and foreign) in the area of telecom and high technology. Telecom FDI limit raised to 74%, from 49%. Service tax has been raised from 8% to 10%. Further, a surcharge of 2% on account of education cess will be imposed on this tax. Zero customs duty on items bound under the Information Technology Agreement. In order to provide a level playing field to the domestic industry, customs duty on specified capital goods and all inputs required for the manufacture of ITA bound items has been removed. Additional countervailing duty (CVD) at 4% has been imposed with immediate effect from 1st March 2005 only on items bound under the Information Technology Agreement, and on specified inputs/raw materials for manufacture of electronics/IT goods. Credit for the CVD will be available against payment of excise duty. IT software and documents of title conveying the right to use IT software will not be subject to this levy. [Read more on Budget 2003-04] [Read more on Budget 2004-05] [Read more on Budget 2005-06]
Key Positives Huge outsourcing potential Offshoring has been well and truly accepted as a major strategic decision that can enhance the competitive advantages of global corporations. The value proposition of offshore development has been proved beyond doubt and as an industry, offshoring is still very much in the growth phase. Even among the global 1000 companies, the penetration levels are not that high. This is a significant point, since these are companies with IT budgets in the range of US$ 500 m to over US$ 1 bn. The global market share of Indian companies is also miniscule. Thus, these pointers are clear indications that there is plenty of room for the Indian software industry to grow, given the immense and untapped potential. Moving up the value chain Indian software companies are consistently broadening their portfolio of offerings and moving fast up the software value chain. Given that traditional services, such as application development and maintenance (ADM), are getting commoditised, it is imperative for these companies to move higher up the value chain into areas like consulting, package implementation and systems integration. Not only will this help Indian companies get higher billing rates from their clients, it will also give them an opportunity to work closely with the top managements of client companies. Scale benefits of past investments In anticipation of higher demand for their services going forward, Indian software companies have rapidly ramped up their employee base and opened development centres and sales offices abroad. These initiatives are likely to pay-off over the long-term as these companies start to derive benefits of large scale as they grow larger in size. Global Delivery Model The Indian offshoring model, or the Global Delivery Model, has been one of the biggest positives for the growth of the Indian software sector. Large companies like Infosys and Wipro [Get Quote] have indeed refurbished this model to accommodate to the changing times. What is more, the fact that MNC technology majors like IBM, EDS and Accenture themselves have tried to replicate this model gives it greater authenticity. Other positives Among other positive factors for the Indian software industry, the major ones are - large availability of talented manpower, cost advantage and geographical advantages (time-zone advantages).		Key Negatives High reliance on the US markets The US market's share in India's software and services exports is fairly high, at around the mid-60s or thereabouts. Such a large degree of dependence on a single geographical location spells high risk for the Indian software sector. Over that, the backlash in the US against outsourcing of jobs to low-cost countries like India has raised some medium-term concerns for Indian software companies. Decreasing cost advantage Increasing competition from global technology majors has not only threatened the Indian IT industry's cost leadership, Indian software companies have also been made to face intense competition for talent. All these pressures mean flat billing rates and higher employee costs going forward. This is likely to affect margins and, consequently, the profitability of Indian companies. High rates of attrition High attrition, especially in the middle and senior positions, continues to damage the performance of Indian software companies to a certain extent. Apart from competition for talent from MNC technology majors, internal factors like job dissatisfaction and higher aspirations (in case of BPO companies) have led to such high attrition rates in the Indian software sector. Hardware and domestic markets While India's software and services exports have witnessed robust growth over the past few years, the growth in the domestic and hardware market has been relatively staid. This is a key cause of concern for the growth of the Indian IT industry.

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