Digital services revenue contributed more than 30% to total revenue, indicating strong momentum of digital transformation opportunities.
According to NASSCOM, revenue from India’s technology sector is expected to reach $350 billion by 2025 and India is now the third largest startup ecosystem in the world. We are also witnessing the steady rise of SAAS companies from India, the massive rise of GCCs, the focus on deep tech and many emerging tech companies including AI, robotics, space tech, fintech, etc.
However, global macro trends around inflation and the impending recession are expected to challenge the sector, and we are already witnessing earnings pressures and a fall in the valuation of listed Indian technology stocks.
That being said, government initiatives in last year’s budget have played a vital role in shaping and strengthening India’s technology sector.
Based on a survey we conducted for the technology sector, we’ve listed key budget expectations below, along with our thoughts on what the budget could address.
Top focus areas for Budget
Grant Thornton Bharat’s Pre-budget Industry Expectation Survey covers key areas of budget focus and percentage of respondents:
- Digital infrastructure and skills development (40%);
- Data privacy (31%);
- Focus on new technologies (19%);
- Stimulate production based on technology (10%).
While the demand for tech talent is at an all-time high, especially in fields like artificial intelligence (AI), data science, blockchain, cybersecurity, robotics, cloud, etc., India will continue to dominate the global tech services market. The vast pool of technical and engineering talent, as well as the impact of high-performance business and digital transformation on global customers, is expected to drive the industry’s growth in global markets.
Increased spending on digital skills development and upskilling in the IT sector is needed at several levels, including schools and universities. Together with Tier 1 cities, Tier 2 and 3 cities should become the next talent hubs by improving their digital infrastructure and internet penetration. This, in turn, will increase access to the existing pool of digital and technical talent across the country.
The recent move by the UGC (United Grants Commission) to allow foreign universities to operate directly in India is a very welcome step in this direction to improve the quality of talent, including technical and digital talent, in the country. One should expect appropriate permission rules to enforce this policy in the coming days.
With the rise of cyber threats, increased cyber security preparedness and related investments are now a must.
The emergence of digital transformation, hybrid working, increasing use of the Internet of Things (IoT) and the rollout of 5G have increased cybercrime around the world. Also, an increase in cybersecurity breaches has created a need for various organizations to implement policies that promote investments in creating a cybersecurity framework and making digital spaces more secure for citizens. You would expect the budget to offer a strong focus on cyber risk and security, as well as data risk and storage.
For India to continue its technological dominance in this decade, innovation and focus on deep tech and the establishment of more technology product companies is necessary. To stimulate new ideas and innovation in new technologies, investments are expected to enable the establishment of state-of-the-art incubation and innovation hubs, led jointly by experts from industry and academia, capable of turning nascent ideas into sustainable businesses and a larger social impact through the use of technology.
Taxes and ease of doing business
Grant Thornton Bharat’s Pre-budget Industry Expectation Survey highlights the main areas that the budget could cover in relation to tax benefits and the corresponding percentage of respondents:
- Simplifying capital gains tax (52%)
- Clarify withholding tax scheme (17%)
- Harmonization of APA and Safe Harbor rules (8%)
- More effective tax litigation management (23%)
In our view, the rationalization of capital gains taxes and the alignment of listed and unlisted stocks would provide a strong boost to technology investors. Further, the simplification of the current withholding tax regime, having a more effective system for managing tax disputes, as well as clarification around international tax regimes such as the Advance Pricing Agreements (APA) and Safe Harbor Rules will increase the ease of doing business for the techies. sector.
Grant Thornton Bharat’s Pre-budget Industry Expectation Survey identifies key areas of focus required for promoting tech start-ups and the corresponding percentage of respondents:
- Some window clearances (61%)
- Parity in long-term capital gains tax rates (13%)
- Exempt capital gains tax for first-time buyers (11%)
- Report rules for direct listing abroad (15%)
From a tax standpoint, easing such as getting tax through one-stop shops and regulatory incentives can bolster the start-up ecosystem.
Furthermore, an extension of the right to a 100% tax exemption, increasing the holiday from 3 years to 5 years in a block of 10 years from incorporation; providing parity in the long-term capital gains tax rate (LTCG) for both listed and unlisted markets; and granting capital gains tax exemptions for reinvesting the proceeds of the sale of shares of one start-up in another start-up would be additional areas the budget could address for tech start-ups.
Creating a more open environment around fundraising opportunities both within the country and from foreign investors is also an important expectation. Measures around creating a tax-neutral cross-border acquisition regime for Indian companies and enabling more flexibility for foreign listings are some of the requests that remain unfulfilled, and it is hoped that this budget will provide relief in these areas.
India is well prepared to remain a global leader in technology, and the forthcoming budget should set out a visionary path and implementation plan to be both a vibrant digital Bharat and a safe and secure digital Bharat.
(Raja Lahiri is Partner-Growth, TMT Leader, Grant Thornton Bharat LLP. Opinions expressed are personal)