Should IT Companies Have Tax Holidays?

"Come to think of it, the government could use these funds in innovative ways. It could use some of these funds to create more technology-oriented and product-oriented companies, like giving loans at cheaper rates, or investing in those companies on part-loan, part-equity model, creating zones and lab setups for such tech startups, or reimbursing money for patenting, or decreasing employee taxes to technology startups in the first three years before they start making profits, etc."

- Hah! dream on, buddy. If the Indian government or for that matter any government in the world would have been so thoughtful and efficient, socialism and its convoluted form - communism, would have succeeded a long time ago and there would have been no need for free market capitalism. But we know that pigs do not fly.

If it would have been left solely to the Indian government, India would not have had an IT industry. According to what I remember, the only IT company ever run by the government was CMC Ltd. Everybody is aware of its shoddy performance. Eventually, TCS gobbled it. Even the employees of CMC were glad when TCS bought them.

Why are you so enamored of the government involvement in every damn thing we do in our life? Do you not have faith in yourself or people who surround you? Do you not expect individuals to take the right decisions when the need arises? Do you believe that people have to be told by others about what is right and what is wrong, especially when it comes to earning or spending their money?

Here, we are talking about optimization of resources. Are you not aware that many times locally optimal solutions also lead to globally optimal solutions for the optimization problems? Of course, I do accept that many times it does not happen. The optimality achieved by the solution algorithm depends on the starting point and nature of the problem. Therefore, we have to remain satisfied with sub-optimal solutions.

I said this because your daily whining about government not being involved, your serious case of envy for the wealth creators of our society, and your politics of entitlement in the form of "majority must concede" and "reservations is the panacea for all social ills" have started to grate my nerves.

Regards,
Aninda

I believe the author is saying these companies succeeded BECAUSE of government support in the form of low/zero-tax policies - a preferential form of treatment, he is calling to be removed - thus in this case, he's calling for less government support for the IT sector, rather than more.

Libertarianism cuts both ways, mate.

Anindo:
I don't know who you are and I don't care what you do. But you assume a lot. Can't you stick to the topic and weigh it within the scope of the article?

[EDITED - IRRELEVANT PROVOCATION]

If the Indian government or for that matter any government in the world would have been so thoughtful and efficient

Just because you do not know does not mean things don't exist. There is a saying where cat closes its eyes and thinks the world is dark. Many European nations sponsor local entrepreneurship by giving aggressive incentives. Some states in US to lure entrepreneurs to set up shop in their state give tax incentives, give access to test facilities. Even Indian government for that matter has schemes to participate and reimburse a certain amount of monies involved in IP creation. How about USOF (universal service obligation fund)? Don't you think that has come to the aid of allowing telecom operators to go into rural areas? What about SEZs and STPIs? How about land to software companies at throwaway prices? How about 25% investment into setting up fabs?

I could go on, but would it help? I don't think so. As one Nobel Laureate noted, there are few things one could teach a dog, but not Newtonian Physics.

I have no clue how you got the idea that I seek government intervention in everything. But again, one could imagine almost anything - as seen in your case. I was referring to taxes here. Taxes come under the domain of the government.

...have started to grate my nerves.

Hmm... :)
Can't teach dog Newtonian Physics. Sorry, can't help you in that department. Ignorance can be bliss, but half-knowledge could be a pain on your nerves.

AnArch,

Did you notice that I did not object to Sujai's issue of charging/not charging taxes from the software companies? I specifically put the statements that I objected to in the quotes for better context. I was laughing at his utopian vision of what the government will do with that money.

Sujai,

"Dimwittedness can be overwhelming sometimes. One wonders if humans are going through some kind of mutation resulting in massive lowering of IQ or is it that the Indian education is so bad that it is only breeding mediocrity, completely extirpating all signs of intelligence out of an individual."

- I am sorry that it is frustrating for you to be mediocre. Do not give up hope, brother. Keep trying. May be you will develop some intelligence in the near future. Now I know why you push for the "entitlement" politics. As far as Indian education system is concerned, I have always doubted its quality because it keeps producing morons like you.

"What about SEZs and STPIs? How about land to software companies at throwaway prices? How about 25% investment into setting up fabs?"

- How did you know that I support SEZs and STPIs? I am sure if you listen to my reasons for opposing them, you will start supporting these ventures. Do "your kind" have the balls to take the necessary policy steps to attract manufacturing investment in India without setting up aberrations like SEZs or STPIs? I am against government getting into any kind of business venture. What is the need for the government acting as a middle man to provide land at concessions to the industry? Why can't the government let industrialists negotiate directly with the land owners and just act as an impartial party to oversee the fairness of the transaction from the perspective of the market? Have you thought about it, genius?

Now, let me go. I have to put up a barbed wire in the fence to prevent illegal Bangladeshis from entering India ;-)

Sujai

I would prefer that the Govt reduce taxes altogether for everybody. let everybody pay the same taxes. I would also advise the Govt to reduce the complexity of corporate and individual tax structure as much as possible. reducing taxes I believe would encourage large private investment across the nation.

The Govt should also reduce wasteful expenses in

a. the NREGA (16000 crores)
b. fertiliser subsidy (16000 crores)
c. Mid-day meal scheme (about 7000 crores)

Instead use this money (39000 crores) to

a. Reduce supply chain problems for farmers and therefore reduce wastage and get them better prices (increasing consumption). This brings down inflation and therefore reduces borrowing costs

b. build a scholarship program (from class IV-V to class X)identifying talented children of parents with less than Rs 100000 incomes (p.a). This would cost about 7000+ crores to benefit approximately 7 million children a year. Dramatically improving the number of kids coming out of the school system every year. This controls wage inflation and therefore reduces the cost of setting up a new business.

c. Start investing in rural water infrastructure slowly and gradually to ensure reduced water problems. This again increases consumtpion and therefore the size of market for any product. Will also enable greater segmentation, means there wouldnow be an opportunity for numerous niche products (more innovation)

The Govt should also disinvest from all PSUs bringing down their share to about 40%. This will raise close to 200000 crores which can be utilised for building massive transport,power and water infrastructure across the country. This will again reduce dramatically the cost of conducting business as well inflation.

Bringing up supply chain efficiencies as well as volume benefits will reduce inflation (as mentioned above), this in turn will reduce borrowing costs, this in turn will enable people with good ideas to borrow at extremely low costs.
Disnvesting from financial services will increase competition and in turn will force banks and FIs to seek to create new funds- example- Financing high risk,high innovation products.......

This is my way of looking at taxes...

rgds

Sujai,
Excellent suggestion. High time the big IT companies paid taxes and took resposibility for funding infrastructure.Not many people have criticised the IT companies in the body count driven business for ruining the infrastructure(in a city like Bangalore)and expect non IT sector to bear the brunt of taxation.

It is hypocritcal for IT corporate honchos to criticise the bad condition of roads(a result of body count business)and evade responsibility of paying taxes.

Anindo,
You appear to miss the obvious: a country without a goverment is like playing soccer without a referee.

Anindo
Do you have any idea of the contribution made by the I T sector in India's Economic growth? Check the statistics and get your arguements vindicated.
If John Maynard Keynes were to be alive he would have died laughing on seeing your comments.

A timely article Sujai.I was wondering when someone would come up with something like this.Don't let Anindo get under your skin.He belongs to that tribe who cry foul as soon you ask why there shouldn't be a degree of fairness.

I agree with Sujai.The I.T Industry DEMANDS better infrastructure.They want S.E.Z'S,roads,etc to be set up at tax-payers money because however you look at it in the end the tax payer is the one who ends up subsidising these sops.If you want infrastructure start paying your taxes like the rest of us.It can't be "we want all the benefits and none of the responsibility.."

Besides we don't have to give freebies to people who are afraid of embarassing foreigners by singing the national anthem.

IT Buster,
I am not arguing for the absence of a government in a nation state. Government has a role to play in many areas of our lives like security, defense, social infrastructure etc. etc. That is why they need to collect taxes. I am arguing against reliance on the government to take care of every aspect of your life. As far as my opinion is concerned, India has too much governmental interference in our daily lives.

Chandra,
You spoke my mind with your post. Excellent response. Thanks a lot.

Soros,
Can you elaborate on what you are trying to say?

Anand Menon,
You know what is unfair in today's world:

- http://www.youtube.com/watch?v=h-G5NCSqvSM

- Unfairness is how the ministers of the government behave when faced with rational questions by ordinary men. This is because they are wallowing in the power they have over the people.
http://www.indiaearnings.com/videos/videos.php?autono=270431

- Unfairness is when a poor illiterate villager is treated like shit by the government employees when he goes to the land records office to verify his records.

- Unfairness is when I have to bribe Income Tax officials to get my own tax refund annually.

- Unfairness is when a gentleman above the age of 60 years has to run five times to a far-off office to get all the papers related to his pension sorted out. That also happens after paying a bribe.

GoI is like a black hole. Whatever money goes in, never comes out. In which other country in the world you have to bribe people to get your own legitimate money back from your own elected government?

From the past track record of the GoI and my everyday experiences, I do not trust them to get anything right, least of all business. That is why I laughed at Sujai's notion of the government as some sort of a benevolent agency to take care of business interests. Hope that clears some of the things that I had in my mind when I wrote that first comment.

I stick to what i had to say earlier.The IT industry should be taxed just like any other industry.I don't care what you consider fair Anindo

IT is not the panacea for India's problems.We don't need put IT leaders on pedestals .They are false Gods.They have negotiated for and GOT various concessions and continue to argue for further concessions without ant benefit to the tax paying public as a whole.They are responsible for the sad state of our infrastructure as pointed out by Sridhar.

Pay your taxes first JUST LIKE EVERYBODY ELSE and then talk about governance.Sridhar is right.The disingenous arguments put forward by the IT industry need to be exposed.

The rest of us can think for ourselves.Why should we ultimately hand over the tax concessions to people who are ultimately concerned about potential embarassment caused to foreigners by the singing of the National Anthem.Traitors deserve to be lined up and SHOT.

...lets give these false heroes a PERMANENT tax break.

Anand: IT is not the panacea for India's problems.We don't need put IT leaders on pedestals

Chandra: I agree

Anand: They are responsible for the sad state of our infrastructure as pointed out by Sridhar

Chandra: Too simplistic!!! Completely disagree.


Anand:The rest of us can think for ourselves.Why should we ultimately hand over the tax concessions to people who are ultimately concerned about potential embarassment caused to foreigners by the singing of the National Anthem.Traitors deserve to be lined up and SHOT

Chandra: hehehehe....People are really after him.......:-)

Sometimes we get lot of satisfaction by lowering our standards :) I know this sounds cheesy, but I have had extremely low expectation from Indian government. But experiences in India, in the last four years that I have been here, have been quite positive compared to my expectations.

For example, take a look at USOF, this is a fund raised by the government from the current cellular operators. The size of the fund is $2B now. This money is now used for giving concessions to the cellular operators who would make deployments in rural areas.

One wonders, could our government have foresight to do something so remarkable. I have seen very few countries with this kind of foresight.

Before we congratulate the government of India, see some of the stupid things they do. They did not have foresight on the management of the frequency spectrum. In India, defense and space programs are sacred. No questions are asked. Hence, they gave away the spectrum in extremely inefficient manner- completely scattered. Each force has different spectrum leaving many gaps in between. And some private Indian companies have gone and secured some spectrum for themselves (I don't want to name those companies here).

I really admire the government's decision to give tax holidays to IT companies long ago when this revolution started in India. However, I believe its a good time to take a relook at this strategy and make some changes to bring at least few big guys into the tax fold. One could come up with smarter ways of taxing IT companies differently at different stages.

How does the government treat some non-IT industries? Take a look at Peenya and other hardware parks of Bangalore. It is extremely sad. While the IT software companies get swanky building, green gardens and roads, some of the hardware companies I visited do not have paved roads. On one of the roads, there was a huge crack right in the middle, so one has to take car in such a way that the crack should always be between the tires. They don't have water facilities and few of them have electricity.

Now what kind of work are they doing? One of them makes sophisticated components for Airbus, and one makes critical components for nuclear reactors of India. They complained about the infrastructure and said thats how the state has been. They are neglected.

Only certain companies (such as IT bigwigs) get all the limelight and seem to enjoy privileged status. While many others languor in the darkness.

While individuals, private institutions, investors, etc, can make a big difference, it is not quite adequate to make a huge difference. While IT companies, such as Infosys, Wipro, Satyam, etc, have made significant contributions, that would not have been possible without the support of the government- tax holidays, sops, easier access to facilities such as broadband and telephony, lands at throwaway prices, etc.

At a time when these companies were competing with other consulting firms, they had the benefit of tax holidays to decrease their cost for each project.

I have been hoping for fab in this country for more than ten years now, and I haven't seen anything happen. Now that Indian government has agreed to pitch in 25% of the investment (to the first 2-3 fabs), we have already seen announcements for two fabs.

Reforms in the banking, stock market, foreign exchange conversion, etc, were all important steps taken by the government of India that enabled the recent spate of growth. An individual, however innovative, cannot break certain barriers on his own. The government of India, however corrupt and inept it is, has to intervene to make things little better for this enterprising individual.

Certain companies in India, who have made a big mark, have been able to do so, either because the government has been a facilitator (a fair one) or a sympathizer (an unfair one).

I have seen certain government heads whose commitment and dedication can be quite humbling. Real go getters, trying to the fight the complex system that Indian government is, and still trying to make better laws and reforms for the growth of industry.

I do not wish to write off Indian government. Yes, there are too many illogical and stupid laws. But then, how else can one work if not work with them?

Chandra:
Fundamentally, I agree for lowering of taxes across the spectrum while bringing more people into the tax fold.

Right now, we have too many evaders, and also, there are too many who escape through the loopholes, because of weird and confusing tax system of India. I definitely prefer a simple mechanism.

I don't mind paying higher taxes if such taxes can result in better amenities- such as health, social security, etc.

Coming to Mr. Murthy, with all due respect to him, I think he was bending over backwards when he made those comments about National Anthem. He should have been careful. Lot of people look up to him, and what he says, matters.

One has to give credit to Mr. Naryana Murthy and Infosys for certain things that they have done so well. They have put (along with other IT companies) India on the map of IT world. They have contributed to changing the image of India from being a land of snake-charmers to land of software engineers :)

In addition, they have ensured to create wealth amongst its employees. They created a brand where a nice person doing nice things can still make money. Also, their handing over baton to the next person is a good practice (which is uncommon in few other companies).

However, Murthy said he is against a tax holiday for IT companies. "I think we have to pay taxes. After all, what's the difference between a company that serves Indian consumers and a company that serves outside? There is no difference."

Look what Narayana Murthy says:

However, Murthy said he is against a tax holiday for IT companies. "I think we have to pay taxes. After all, what's the difference between a company that serves Indian consumers and a company that serves outside? There is no difference."

Chandra: Too simplistic!!! Completely disagree.

It isn't simplistic.read #6 by Sridhar.The government isn't responsible for the body count business...the B.P.O and IT Industry IS...

Hi Anand

Please correct me....I have interpreted your statement as

Because the IT/BPO industry hires a lot of people, and these people in turn use roads more extensively the roads get damaged much more quickly and since the IT industry pay lesser taxes, all the problems of infarstructure are because of the IT Industry? Is that the correct interpretation?

If this is indeed your interpretation,let me ask you the following single question

Can you back up with any evidence that suggests that lack of funds is why we have a problem of infra in bangalore? Thank you


rgds

I would qualify your remarks Chandra...I would say that the IT/BPO Industry has exacerbated an already existing problem.We don't need so many more lakhs of people to use the roads for them to go bad...I'm a Civil Engineer...we all know they are badly built as it is.For a fleeting moment let's forget about the quality....assuming quality has theoretically been achieved(which hasn't been and never will be)...the problem simply boils down to providing for more of everything...in other words....we would need more buses,more local trains,more metros,more mono rails,more elevated roads,more parking lots,more public spaces....for all those people.....all of which cost money......and the only institution which can sink in money on that large a scale is of course the government.....for which it needs to raise taxes.

I do not subscribe to the deeply cynical view that governance and fund utilisation is the pits and therefore one shouldn't pay taxes....

The IT/BPO industry is no longer a "sunrise" industry.....is it too much to expect only the non-it sector to bear the brunt of infrastructure expenses?

Lets come back to your question
1.The outsourcing boom has lead to an inevitable rise in the body count

2.The IT industry is fully aware of that body count and continues to expand that body count.

3.It DEMANDS infrastructure improvement/augmentation when it is contributing zilch.

4.It continues to put forward the specious argument that further sops/subsidies/sez's ,low tax regimes should be maintained in order to maintain competitiveness.....conveniently forgetting to mention that only a part of the massive profits which they make are to be paid as taxes towards infrastructure.

The message is clear from them "NO TAXES FOR THE IT /BPO INDUSTRY"....well then!if they are contributing to the mess and not contributing to the kitty should they be complaining?...especially if they want all the benefits and none of the responsibility?


Now to the other implication of your question...assuming that we had the IT Industry paying their taxes would we see a substantial improvement in services?Its common knowledge that due to ...errr...lets be charitable ....various inefficiencies ...roughly 10 paise out of every rupee that comes as tax is actually spent on development....yes! 10 paise:)).....now lets say for arguments sake the non-it sector is contributing say Rs 1000 crore towards tax...in other words 10 crore gets spent on actual development....now the IT SECTOR which can potentially contribute 10000 crore is not contributing anything...which means that realistically one has been siphoned out 100 crore out of infrastructure development.

As citizens we all have a duty to pay taxes.....we all have a duty to ensure that those very taxes are properly accounted for....we all have to hold the same shitty bastards who rule us to account....but first we have to do our duty...pay our taxes.

Anand

My question was fairly simple

"Can you back up with any evidence that suggests that lack of funds is why we have a problem of infra in bangalore? Thank you"

rgds

Chandra and Anand:
Forgive my intervention into your tête-à-tête.

I think Chandra wants to prove that lack of funds is not the reason why the infrastructure is bad in Bangalore. The reasons why the infrastructure is bad are found elsewhere (it could be bad policies, bad planning, lack of will to improve, shoddy project work, slow progress).

Therefore, according to him, whether the IT companies pay taxes or not, the situation will not improve since these reasons will not go away.

I think Anand wants to say that since these IT companies which actually contribute to the 'deterioration', should not keep complaining and expecting better infrastructure especially when they do not contribute to the funds that can make these better.

I think they are two different things. We keep coming back to this topic again and again. About rights and responsibilities!

Should one who doesn't vote criticize the non-performing government? Should one who doesn't pay taxes ever demand better amenities from the government?

Should one not pay taxes because the government is inefficient? Should one not pay taxes because the government is corrupt?

I believe that you differ in your opinions on these questions above!

Here is a good study by an economist on what happens when the government raises taxes:

http://gregmankiw.blogspot.com/2007/04/matthew-effect.html

Of course, this is in the American context.

Regards,
Aninda