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India’s Information Technology

Overview
Over the past decade, information technology industry has become one of the fastest growing industries in India. Strong demand over the past few years has placed India amongst the fastest growing IT markets in the Asia- Pacific region. The Indian software and ITES industry has grown at a CAGR of 28 percent during the last five years. It is expected that the contribution of IT and ITES to national GDP will rise to 7 per cent by 2007-08 against 4.8 per cent in 2005-06.
Recognizing the advantages of multi-country service delivery capabilities to better manage evolving customer requirements and execute end-to-end delivery of some new services, Indian companies are enhancing their global service delivery capabilities through a combination of Greenfield initiative, cross-border M&A, partnerships and alliances with local players. Global software product giants such as Microsoft, Oracle, SAP, etc., have established their captive development centres in India.
 
India's record on information security ranks better than most locations. The authorities in India are maintaining a keen emphasis on further strengthening the information security environment in the country. Specific initiatives underway include enhancing the legal framework through proposed amendments to the IT Act 2000, increasing interaction between industry players and enforcement agencies to help create greater awareness about information security issues and facilitate mutual support.
 
A majority of companies in India have already aligned their internal processes and practices to international standards such as ISO, CMM, six sigma, etc., which has helped to establish India as a credible sourcing destination. As of December 2005, over 400 Indian companies had acquired quality certifications with 82 companies certified as SEI CMM Level 5- higher than any other country in the field.
 
The total number of IT and ITES- BPO professionals employed in India is estimated to have grown from 284,000 in 1999-2000 to 1,287,000 in 2005-06, growing by 230,000 in the last year alone. In addition, Indian IT - ITES is estimated to have helped create an additional 3 million job opportunities through indirect and induced employment.
 
Production Profile
According to National Association of Software and Services Company (NASSCOM), the Indian IT software and services sector grew by 31.4 percent during 2005-06, notching up aggregate revenue of US$ 29.6 billion, up from US$ 22.5 billion in 2004-05. Encouraged by the 2005-06 performance, the IT and ITES sector is confident of achieving the US$ 60 billion milestone in exports by 2010.
 
The Business Process Outsourcing (ITES-BPO) sector has emerged as a key driver of growth for the Indian software and services industry in 2005-06. The ITES-BPO industry recorded a growth of 37 percent and clocked revenues of US$6.2 billion.
 
Consumer electronics sector is estimated to achieve a production level of Rs. 18,500 crore during 2005-06 as compared to Rs.16, 800 crore in the year 2004-05, thus achieving a growth rate of 10 percent. The fast growing segments during the year were colour TV, DVD players, and home theatre systems.
 
The sale of personal computers is likely to touch 47 lakh numbers during the year 2005-06. The communication and strategic electronics sector is showing a growth of about 10 percent.
 
The production and growth trends during the last five years have been as follows:
 
Year
Production (Rs. Crore)
Growth (Percentage)
2000-01
68,850
31.3
2001-02
80,124
16.4
2002-03
97,000
21.1
2003-04
118,290
18.2
2004-05
152,420
28.8
2005-06
185,660
21.8
 
Key Growth Drivers
According to NASSCOM, the high performance of the IT-ITES sector was in large part due to factors such as the emergence of a more efficient global delivery model, the unbundling of large IT outsourcing deals with larger India-based delivery shares, and the bagging of large contract by the country's players. Some of the other performance drivers were ever-deepening customer relationships, cross border mergers and acquisitions, the move of the industry towards a stable pricing model.
 
Indian IT and ITES companies have moved up the value chain and have expanded their product and service portfolios gravitating towards higher value processes and achieving increased traction in engineering and product development services.
 
India's edge in the off shoring domain was based on factors such as availability of people's skills, a conducive business environment, focus on information security and operational excellence by leading IT-ITES vendors and relevant financial structures.
 
Policy Framework
Industrial Approval Policy
  • Industrial Licensing has been virtually abolished in the Electronics and Information Technology sector except for manufacturing electronic aerospace and defense equipment.
  • There is no reservation for public sector enterprises in the Electronics and Information Technology industry and private sector investment is welcome in every area.
  • Electronics and Information Technology industry can be set up anywhere in the country, subject to clearance from the authorities responsible for control of environmental pollution and local zoning and land use regulations.
  • Large and Medium Industries exempted from licensing are only required to file information in the prescribed I industrial Entrepreneurs' Memorandum (IEM) with the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion, Ministry of Commerce & Industry, Government of India and obtain an acknowledgement. Immediately after the commencement of commercial production, Part B of the IEM has to be filed. No further approval is required. Small Scale Industries are required to register with the District Industries Centre (DIC). Forms can be downloaded from the website of the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry.  
Foreign Trade Policy
  • India welcomes investors in Electronics and IT sector. Government of India is striving to bring greater transparency in policies and procedures to provide an investor friendly platform.
  • In general, all Electronics and IT products are freely importable, with the exception of some defence related items. All Electronics and IT products, in general, are freely exportable, with the exception of a small negative list which includes items such as high power microwave tubes, high end super computer and data processing security equipment.
  • Second hand capital goods are freely importable.
  • Export Promotion Capital Goods scheme (EPCG) allows import of capital goods on payment of 5% customs duty. The export obligation under EPCG Scheme can also be fulfilled by the supply of Information Technology Agreement (ITA-1) items to the DTA provided the realization is in free foreign exchange.
  • Special Economic Zones (SEZs) are being set up to enable hassle free manufacturing and trading for export purposes. Sales from Domestic Tariff Area (DTA) to SEZs are being treated as physical export. This entitles domestic suppliers to Drawback/ DEPB benefits, CST exemption and Service Tax exemption.
  • Supplies of Information Technology Agreement (ITA-1) items and notified zero duty telecom/electronic items in the Domestic Tariff Area (DTA) by EOU/EHTP/STP/SEZ units are counted for the purpose of fulfillment of positive Net Foreign Exchange Earnings (NFE).
  • The import of second hand computers including personal computers and laptops are restricted for imports. However, second hand computers, laptops and computer peripherals including printer, plotter, scanner, monitor, keyboard and storage units can be imported freely as donations by the following category of donees, subject to the condition that the goods shall not be used for any commercial purposes and are non-transferable:
    • School run by Central or State Government or a local body
    • Educational Institution run on non-commercial basis by any organisation
    • Registered Charitable Hospital
    • Public Library
    • Public funded Research and Development Establishment
    • Community Information Centre run by the Central or State Government or local bodies
    • Adult Education Centre run by the Central or State Government or a local body
    • Organisation of the Central or State Government or a Union Territory  
Foreign Direct Investment Policy for Information Technology
FDI upto 100 percent is permitted for E-Commerce activities subject to the condition that such companies would divest 26 percent of their equity in favour of the Indian public in five years, if these companies are listed in other parts of the world. Such companies would engage only in business to business (B2B) E-Commerce and not in retail trading, inter alia, implying that existing restrictions on FDI in domestic trading would be applicable to E- Commerce as well.
 
Export Promotion Schemes
Special schemes are available for setting up Export Oriented Units for the Electronics/IT Sector. These schemes are:
  • Export Oriented Unit (EOU) Scheme
  • Electronics Hardware Technology Park (EHTP) Scheme
  • Software Technology Park (STP) Scheme
  • Special Economic Zones (SEZ) Scheme
    • Export promotion Capital Goods (EPCG) Scheme
    • Duty Exemption and Remission Scheme  
EOU/EHTP/STP Schemes
Units undertaking to export their entire production of goods and services, except permissible sales in the Domestic Tariff Area (DTA), may be set up under the EOU, EHTP or STP Scheme for manufacture of goods, including repair, re-making, re-conditioning, re-engineering and rendering of services. Trading units, however, are not covered under these schemes. 100% Foreign Direct Investment is permitted through automatic route for the units set up under these schemes. EOU/EHTP/STP units may import and/or procure from the DTA or bonded warehouses in DTA, without payment of duty, all types of goods, including capital goods, required for its activities, provided they are not prohibited items of import in the ITC(HS). The units shall also be permitted to import goods including capital goods required for the approved activity, free of cost or on loan/lease from clients. An EOU/EHTP/STP unit may, on the basis of a firm contract between the parties, source the capital goods from a domestic/foreign leasing company without payment of customs/excise duty. EOU/EHTP/STP unit shall be a positive net foreign exchange earner. Net Foreign Exchange Earnings (NFE) shall be calculated cumulatively in blocks of five years, starting from the commencement of production. The donation of computers, imported/indigenously procured duty free by EOU/STP/EHTP units to recognized non-commercial educational institutions, registered charitable hospitals, public libraries, public funded research and development establishments, etc., two years after their import/procurement and use by the said units is permitted.
 
Supplies of Information Technology Agreement (ITA-1) items and notified zero duty telecom/electronic items effected from EOU/EHTP/STP units to DTA will be counted for the purpose of fulfillment of positive NFE. EOU/EHTP/STP units are permitted DTA access upto 50% of the FOB value of exports subject to fulfillment of positive NFE on payment of concessional duties. Depreciation upto 100% is permissible to computers and computer peripherals over a period of 5 years.
 
Export Promotion Capital Goods (EPCG) Scheme
The EPCG Scheme allows import of capital goods for pre-production, production and post-production (including CKD/SKD thereof) at 5% customs duty subject to an export obligation equivalent to 8 times of duty saved on capital goods imported, to be fulfilled over a period of 8 years. The capital goods shall include spares (including refurbished/reconditioned spares), tools, jigs, fixtures, dies and moulds. Second hand capital goods without any restrictions on age may also be imported under the EPCG Scheme. The export obligation can also be fulfilled by the supply of ITA-1 items to the DTA provided the realization is in free foreign exchange.
 
Duty Exemption and Remission Schemes
The Duty exemption schemes enable duty free import of inputs required for export production. An Advance Licence is issued under Duty Exemption Scheme. A Duty Remission Scheme enables post export replenishment/remission of duty on inputs used in the export product. Duty remission schemes consist of (a) Duty Free Replenishment Certificate (DFRC) and (b) Duty Entitlement Passbook Scheme (DEPB). DFRC permits duty free replenishment of inputs used in the export product. DEPB allows drawback of import charges on inputs used in the export product. The details of these schemes are available on the website of the Directorate General of Foreign Trade, Ministry of Commerce & Industry ( http://www.dgft.delhi.nic.in ).
 
Advance Licence
An Advance Licence is issued to allow duty free import of inputs, which are physically incorporated in the export product (making normal allowance for wastage). In addition, fuel, oil, energy, catalysts etc., which are consumed/utilized in the course of their use to obtain the export product, may also be allowed under the scheme. Duty free import of mandatory spares up to 10% of the CIF value of the licence, which are required to be exported/supplied with the resultant product, may also be allowed under Advance Licence. Advance Licences are issued on the basis of the inputs and export items given under Standard Input Output Norms (SION). However, they can also be issued on the basis of Adhoc norms of self declared norms.
 
Duty Entitlement Pass Book Scheme (DEPB)
The objective of the DEPB is to neutralize the incidence of Customs duty on the import content of the export product. The neutralization shall be provided by way of grant of duty credit against the export product. Under the DEPB scheme, an exporter may apply for credit, as a specified percentage of FOB value of exports, made in freely convertible currency. The DEPB scheme will continue to be operative until it is replaced by a new scheme, which will be drawn up in consultation with exporters.
 
Duty Free Replenishment Certificate (DFRC)
DFRC is issued to a merchant exporter or manufacturer exporter for the import of inputs used in the manufacture of goods without payment of basic customs duty. However, such inputs shall be subject to the payment of additional customs duty equal to the excise duty at the time of import. DFRC shall be issued on a minimum value addition of 25% only in respect of products covered under the SION as notified by Directorate General of Foreign Trade (DGFT).
 
Major IT and ITES Companies in India
 
  • Tata Consultancy Services
  • Wipro Technologies
  • Infosys Technologies
  • HCL
  • Intel
  • GE
  • IBM
  • Dell
  • Microsoft
  • Cisco
 
Future Outlook
According to NASSCOM, rapid growth will continue to be the hallmark of the IT-ITES sector during 2006-07. The industry is projected to touch revenues of around US$ 36-38 billion in 2006-07, representing a growth of between 25-28 per cent. IT-ITES exports are expected to grow by 27-30 percent in 2006-07, posting revenues between US$ 29-31 billion. The domestic market too is forecasted to grow rapidly at a rate of 20 percent, based on a rollout of E-governance, initiatives and automation of key sectors such as retail, healthcare, transportation and manufacturing among others.