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Tax holidays are a bad idea: India's IT sector is proving it

Neeraj Thakur | Updated on: 10 February 2017, 1:48 IST

Developing nations give tax breaks to industries in the hope of creating jobs for their growing populations. The revenue forgone can be recovered in later years, once the sector becomes self-sustaining.

Based on this logic, the Government of India had given a two-decade long tax holiday to the Information Technology (IT) sector. During this tax holiday, IT companies became the centre of job creation for the middle classes of India.

Under the Software Technology Parks of India (STPI) scheme, IT companies were not only exempt from paying corporate tax, whih ranges between 25% and 33%, they were also provided cheap land to set up those parks.

The scheme lasted till 2011. Thanks to this tax holiday, the IT sector's contribution to India's GDP stands above 8% today, with over 3.5 million people directly employed.

However, the situation is changing fast. While the contribution of the sector to India's GDP may increase in the coming years, the number of people it employs is going to come down sharply.

Job loss on the horizon

A report from US firm HfS Research says that automation is going to take away 6.4 lakh low-skilled jobs - or nearly one in five jobs - in India's IT and BPO sectors in the next five years.

For over two decades, Indian IT companies were billing their clients on the basis of their working staff on a particular project. However, now, this model has changed to reducing the number of people, in order to increase margins.

At the moment, it is being claimed that only low-end jobs are under threat, but in the world of technology, it is hard to define when a high-end job becomes low-end.

What happens to the Indian demography?

The Indian demography seems to be heading towards great distress in the coming years. Currently, India has a workforce of 500 million (50 crore). It needs to generate 10 million (one crore) jobs every year for the next two decades. If it fails to do that, the young workforce will end up unemployed people, resulting in social unrest.

Is there a solution?

It is not possible to stop companies from using technology. But it is quite possible to ensure that governments use tax benefits for sectors that are labour intensive.

For example, the current government is considering a 10-year tax holiday for the electronics manufacturing sector.

Also read- NITI Aayog proposes tax holiday for electronics manufacturers. Will it work?

The idea was proposed by the top government think tank, the NITI Aayog, which argued that a tax holiday will help multinational companies - who invest over $1 billion - to create jobs in India.

But the world of electronic manufacturing, too, is moving towards automation.

A clear example of this is Foxconn, one of the biggest mobile phone manufacturing companies in the world. The company laid off as many as 60,000 people at one go in May this year. The people in the company were replaced by robots.

The Indian government has been wooing Foxconn and many other companies with a similar work model. Therefore, before extending any new tax holiday to any sector, this question must be asked: will the companies in the sector generate enough jobs to make up for the revenue lost?

In an article in Business Today, Jayati Ghosh, a professor of economics at Jawaharlal Nehru University, wrote: "India has one of the lowest tax-to-GDP ratios in the world. At less than 185, it is also the lowest among BRICS countries. Brazil leads with 34%, South Africa is next at 27%, followed by China at 22% and Russia at 19.5%."

Ghosh further added: "While the rate of tax on corporate profits in 2013-14 was 33.2%, the average effective tax paid by 90% of corporates was only 23.2%."

Clearly, this is a result of too many tax breaks given to individuals, as well as corporations.

All this money could have gone into other welfare activities for India's large population.

Lessons from the IT sector

Giving tax breaks may not entirely be a bad idea to promote a sector in the initial days. But allowing corporates to make profits for over two decades is an atrocious decision.

The government promoted the IT sector for over 20 years at the cost of other sectors, only to realise that the sector will soon start employing robots, leaving India's millions of youth jobless.

This mistake should not be repeated.

Edited by Shreyas Sharma

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First published: 7 July 2016, 3:03 IST
Neeraj Thakur @neerajthakur2

As a financial journalist, his interface with the two dominant 'isms'- Marxism and Capitalism- has made him realise that an ideal economic order of the world would lie somewhere between the two.

Senior Assistant Editor at Catch, Neeraj writes on everything related to business and the economy.

He has been associated with Businessworld, DNA and Business Standard in the past.

When not thinking about stories, he is busy playing with his pet dog, watching old Hindi movies or searching through the Vividh Bharti station on his Philips radio transistor.