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April 4, 2005

India’s VAT offers Y2K-like software opportunity

The introduction of a value added tax (VAT) regime from April 1 across 21 states in India calls for a complete transformation in accounting procedures and could be a bigger business opportunity than Y2K, say local software companies.

By CBR Staff Writer

Indian businesses have until now accounted under a sales tax regime, but in 21 of the country’s 28 states they are now obliged to switch to VAT accounting, a sea change that represents a huge business opportunity for ISVs in this sector.

It is reckoned that the market size in India for VAT-enabled software could be as large as $4bn right now, rising to $7bn by 2007, said Bharat Gopalkrishnan, president of Bangalore-based Tally Solutions Pvt, which claims to be India’s largest accounting software vendor. But this is only in the small enterprise segment. There is also a huge market in the large corporate and institutional segment, where the size is anybody’s guess.

Besides tens and thousands of very large business establishments and government departments, India has over 16 million establishments in the very small and small enterprise sector. VAT affects every single business community in some form or the other who will have to change the way they maintained books for over five decades, said Gopalkrishnan.

I would say it is even greater than Y2K, where only those doing online processing were impacted. But in VAT, it does not matter what processes one follows so everybody would have to adopt VAT, he added.

Local players are not the only ones to have detected the business opportunity, of course. The world’s two biggest software companies, Microsoft and Oracle, have also started hawking VAT-enabled products in the Indian market. Microsoft, for instance, has introduced its end-to-end VAT-compliant solution, christened AdVATage, from April 1.

Among Indian software giants, Mumbai-based Tata Consultancy Services (TCS) has been appointed by the commercial taxes department of the Indian state of Andhra Pradesh for developing software that could monitor taxes in the new regime. That software would also be hawked to other state governments, and the Andhra Pradesh government would earn royalties on resultant sales, said a TCS official. It also signifies the potential of VAT software in the country.

But even as the new regime spells bonanza for India’s software sector, it poses a piquant problem for IT hardware vendors. Since the VAT regime allows Indian states to still charge a central sales tax – CST, hardware industry sources say that sourcing inputs from another state will be costlier than imports from a foreign country, as such imports do not attract CST.

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