Economy Stimulus Package gives step-motherly treatment to Services Sector!

By: By S Sivakumar, CA
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The Services Sector which constitutes about 55 pc of the country's GDP has been completely ignored by the Government, while announcing the Rs 32,000 crore bonanza for the Indian industry. While across the board cuts in excise duties have been announced for the manufacturing industry, there is no talk of service tax being reduced. Following the excise duty cuts, we have now a situation where the central excise duty is now a lot lesser than service tax. Taking a specific example, Mr P Chidambaram, the ex-Finance Minister, while presenting the 2008-09 Budget had brought about parity between packaged software and software services by levying excise duty @ 12 pc on packaged software and service tax on software services @ 12 pc. The ex-FM made a spirited statement justifying the equalization of excise and service tax rates in respect of taxation of the Information Technology industry. But alas, post this package, the packaged software industry will have to pay excise at a reduced rate of 8.24 pc, while the poor software services players will continue to pay service tax @12.36 pc. Gone then, is the so called parity.

The Government doesn't seem, at all, to appreciate the fact that it is the services industry which generates a significant quantity of consumers who buy motor cars, consumer goods and of course, flats. Without some sops being extended to the services sector, the Government just cannot hope for a revival of the manufacturing and realty sector, which are really down. Ask any developer in Bangalore or Chennai or Hyderabad. He would confirm that a significant portion of his flats or houses get sold to the guys from the IT industry.

To a large extent, it seems clear that India's export centric IT industry has its big share of problems arising mainly, out of the significant drop in demand from the US and Europe, to which most of India's IT related exports go. There is no doubt about this development which seems to be affecting even the larger players who are planning to call back their IT guys posed abroad, due to a slowdown in on-site assignments. The plight of the SME sector of the IT industry is far worse. With little financial resources to fall back, the tens of thousands of the small and medium players are already feeling the pinch in terms of export orders not coming thro' or getting delayed or not being able to get paid for services already rendered. The 2 pc cut announced for export finance credit would not benefit the services exporters to a very large extent as banks just don't lend to the services sector. When money is not available from the banking system to the services sector, the question of a reduction in the interest rate is of no consequence.

The slowdown has already resulted in a significant loss of jobs in the IT sector and if the slowdown continues, one could see more job cuts. The job cuts are not restricted to the SME players, but also to the large players, as well. Today's papers scream about Infosys and Wipro recalling their software engineers posted overseas, due to the slowdown in on-site assignments. The recently reported incident of Wipro offering BPO jobs to guys, who had earlier been offered software jobs, is perhaps, an indication of how things are currently going on, in the IT industry. With the IT guys being in the danger of losing jobs or being forced to take salary cuts, the mood is one of depression, which is affecting all dependant industries like Realty and Consumer Goods. There are already reports about major EMI defaults by software professionals, who have contracted to buy flats, in cities like Bangalore and Hyderabad. Realty Developers are also already complaining about absolute lack of demand in respect of new housing projects, which is largely attributable to the turmoil that the services sector is facing.

I don't understand as to how a 4 pc cut in prices of cars, consumer goods, etc. (assuming that the manufacturers do pass on the excise cuts to consumers) could result in higher off take of these goods, when nothing has been done to increase the disposable incomes of the consumers, most of whom are middle to upper middle class and most of whom are employed by the services sector. It is here that the Government could do a lot in terms of extending some direct sops to the services sector, as a strategy to boost consumption.

At the time of a clear downturn, it is very important that the services sector is able to conserve cash and one would have expected the Government to play a role in this process. This has clearly not happened in terms of the package which offers nothing to the services sector. The only 'sop' which I could relate to the services exporters is their ability to take a refund of service tax in respect of agency commission. This again, is of no consequence, as the Finance Ministry controlled Revenue Departments do not process refund applications from service exporters, in any case, despite all the tall talk of refunds being made easier, etc.

The Government talks big in terms of SME sector, etc…. but we must keep in mind that, the manufacturing sector only is covered. Obviously, the Government seems to be oblivious of the fact that over 98 pc of the players in the services sector are from the SME segment. On a comparative basis, I would argue that the services sector requires more sops than the manufacturing sector, for the simple reason, that the services sector is more export oriented and is taking the full brunt of the global slowdown, as compared to the manufacturing sector.
Some of the specific steps that I would have expected the Government to take, in terms of encouraging the services sector would be…

1. Reduction of the service tax rate by 4 pc to match the reduced excise rates.

2. Exempt construction services from the levy of service tax. Given the fact that the service tax burden on residential construction is finally borne by the flat buyers, removal of service tax could save about 4 pc for the flat buyer. This move could help both the services sector and the Realty Sector.

3. Implementing a fast package whereby the Banks would lend to the services sector and especially the services exporters and more specifically, the IT exporters. The commercial banks continue to display a near total lack of understanding of the working capital needs of the IT industry. Till now, the IT players were able to raise money from the stock markets and private equity players. With customers delaying payments and with the tap of private equity being closed to a large extent, many of the IT players in the SME sector will find it difficult to survive, especially if the slowdown gets prolonged, which seems to be a very likely scenario. The RBI could put a mechanism of channeling flow of some credit to the IT sector, which could be included in the priority sector targets of banks.

4. Enable services companies (and for that matter, the manufacturing companies as well) to conserve cash, in these troubled times. This could be achieved by allowing these companies to postpone their tax liabilities including advance tax, tax deducted at source, etc. The Government could even allow manufacturing and services companies to postpone their excise and service tax payments and instead of paying these on a monthly basis, these companies could be allowed to pay these at the end of the quarter. These additional funds could be used by the companies and their employees to fuel consumer demand, which is the main objective of the package.

5. Enable the salaried employees and professionals related to the IT industry, to save cash and encourage them to invest. We had started seeing a consumer lead boom in India, thanks largely to these guys, who had helped the Realty Sector grow by leaps and bounds.

6. There is already a talk of the interest rates being reduced for home loans of upto Rs 20 lacs. The Realty Associations have already asked for this benefit to be extended to loans of upto Rs 35 lacs. In my view, this is a very sensible suggestion which would help increase the demand for housing from the customers, which as I said, is mainly drawn from the services sector.

7. When we talk of the services sector, we should also take into account the hospitality sector, which also needs to be stimulated. There have already been reports that five star hotels in Bangalore are working at 15 pc capacity utilization. A complete waiver of taxes for this sector can alone revise this industry, which has seen its fortunes dwindling, over the last few months.

8. The Government needs to appreciate the close link between the services sector and the Realty Sector, which is really down and out. Whether it is residential housing or commercial housing, the Realty Sector's customers are largely drawn from the services sector and especially the IT sector. A boost to the IT sector would in turn result in a corresponding boost to the Realty Sector. Right now, given the global slowdown, the IT sector has its own problems, in terms of availability of cash and this would continue to affect the Realty Sector.

9. Encourage banks to restructure repayment terms of personal loans given to individual borrowers, most of whom are drawn from the services sector. Restructuring of debt should be extended to all borrowers and not necessarily restricted to the manufacturing sector and exporters of goods. This move would also help the private sector banks and foreign banks, which have significant exposure to personal loans.

It is very unfortunate that the Government does not seem to appreciate the fact that it is the services sector which has fuelled the GDP growth of the country in the last few years, if the step-motherly treatment meted out to the services sector in the stimulus package, is any indication. It would be very difficult to believe that the economy could do a turnaround, without invigorating the services sector given the close relationship that exists between the services sector on the one hand and the Realty, Manufacturing and Banking sectors on the other.

(The author is Director of S3 Solutions)

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