Eating into India's Growth

India's
information technology sector has greatly contributed to Indian
economy in the past
decade. Its contribution to GDP, tax revenues, employment, and value
creation is well acknowledged. However for the Indian economy to
realize the full potential of the value generated by the Indian IT
industry, it is imperative to curb revenue losses to the government
exchequer from the high rates of software piracy in India, especially
in companies and organizations. Businesses, who are otherwise
legitimate, use software on a large scale but they evade paying tax
when they are not buying
licensed software, thus causing huge losses to the state exchequer
and disruption of the domestic software ecosystem. This was stated in
an IDC white paper, 'Software Piracy in India: Costing Millions
to State Exchequer in Tax Losses', sponsored by Business
Software Alliance (BSA).

ADVERSE
IMPACT

The study
underlines that software piracy is a global concern as at least 4
out of 10 software programs installed on PCs last year were pirated
copies. The situation in India is even more alarming with a high
software piracy rate of 65%, as measured in 2009 where more than 6
out of 10 PC software programs were not paid for. However it is
commendable to see that in the past few years the country took
various initiatives to reduce the software piracy from 71% in 2006 to
65% in 2009. But despite those efforts, due to high growth of PCs and
laptops in the country and existing piracy, only one-third of the
overall PC software revenues are captured by the industry incumbents
and the rest are lost to software piracy.

A SNEAK
PEAK

The paper
found that in 2010, IT companies paid nearly $3.04 bn to state
exchequer in tax. By 2014, the tax receipt is expected to grow to
$5.7 bn with IT spending expected to grow at a CAGR of 15% until
2014. Despite the growth, substantial value in the form of potential
revenues is lost due to software piracy. With a href="http://www.dqweek.com/Software-piracy-caused-$866-mn-tax-loss-to-GoI-IDC">software
piracy rate
of 65% in 2009, the IDC study finds that only one-third of the
overall PC software revenues are captured by the industry incumbents
and the rest are lost to software piracy. Consequently in 2009, the
state exchequer tax receipts' loss was approximately $866 mn in net
taxes, both indirect and direct. “Spending on software causes a
ripple effect on the broader IT industry because selling, installing,
servicing and supporting soft ware creates downstream economic
activity. Piracy makes all the key stakeholders in the value chain
worse off as it takes away a certain portion of the revenue, in terms
of sales lost to the pirates,” says Harish Taori, research manager,
AP Consulting, IDC Asia Pacific. He further states that the piracy
further deprives an economy from creating more jobs and generating
new tax revenues. The white paper demands from the government to put
in place an enforcement law to curb piracy. “It is important for
the Indian government to curb software piracy levels in order to
harness the full potential of the IT industry,” says Keshav S
Dhadad, chair, India Committee 2011, BSA member company
representative, Microsoft.

The study
also finds that reducing software piracy will stimulate spending
throughout the IT value chain. Because of software's unique role as
a revenue generator for local service and distribution companies,
three quarters of the benefits generated by reducing software piracy
are enjoyed by the domestic economy. For example, if PC software
piracy is curtailed by 5% in 2011, IDC estimates that the incremental
potential industry revenues or the GDP contributions will be $790 mn,
tax revenue of $95 mn and 26,108 new high-skilled jobs will be
created. Frontloading the benefits by reducing software piracy by 10
points in the first 2 years compounds the economic benefits by 31%.

In some
countries usage of unlicensed and pirated software in companies has
already been declared as a form of 'tax evasion'.

CURBING
THE MENACE EARLY

According to
the report, it is government's duty to make it mandatory for
companies to account for their software assets. “Software has to be
considered as an asset and should be audited. Government has to
understand its implications as it will help it create more jobs and
generate more tax,” further says Dhadad. So to curb the levels of
piracy, IDC and BSA have also proposed suggestions:

• Indian
  tax laws to be amended to classify software piracy as a form of tax
  evasion and define corresponding tax violation rules on the lines of
  international best practices

• The
  regulatory bodies in collaboration with government agencies need to
  enhance the legislative environment to classify software as a form of
  tax evasion, in line with the international best practices and in
  accordance with WIPO treaty for IP protection

• Empower
  government tax inspectors, external and internal auditors to check and
  account for genuine software licenses inside organizations, whether
  public or private

• Mandate
  management officials of enterprises and companies to account for and
  declare genuine software licenses in their books of accounts and
  financial statements

• Spread
  awareness around legal, financial, and security threats from software
  piracy and the value of genuine licenses inside the organizations and
  related tax implications. The objective is to get a critical mass of
  people to use legal software and then let the bandwagon effect reach
  new self-sustaining equilibrium

Software
piracy is prevalent in the whole value chain. While the government,
industry bodies, and software companies continue to take initiatives to
curb piracy and educate end-users, challenges at various fronts still
remain. The challenges are that of a robust national IPR enforcement
ecosystem, creation of dedicated IPR adjudication judicial system and
continued capacity building of all stakeholders including the
government decision makers, judiciary, public prosecution department,
law enforcement agencies, CIOs, CFOs, channel partners, and end-users.