Software players keep tax exemption but worry about public sector blockage

Employees in the IT sector will escape having to pay a tax on their earnings after all, it was decided in a meeting between representatives of the software industry and prime minister Emil Boc. The news that the authorities were considering axing the tax exemption for IT programmers, as part of the austerity measures, shook the software industry. But the sector is not out of the woods yet. Pundits tell Business Review what the standstill on any IT investments in the public sector will entail and how they believe their businesses will fare in crisis mode.

Otilia Haraga

Last week was a tense time for the software community as industry representatives contested the government’s intention to remove their tax-exemption facility. In a letter addressed to president Traian Basescu, the National Association of Software and Services Industry (ANIS) expressed its opposition to the move, arguing that the IT industry is a “model industry” for the Romanian economy that has developed spectacularly over the past 10 years, posting constant double-digit growth from year to year, without receiving subsidies from the state budget, unlike other industries.

“While the beginning of the 2000s saw a real exodus abroad of IT specialists who were motivated by attractive financial and career development opportunities, the promotion of the ‘zero tax’ facility for programmers helped halt this phenomenon,” says Liviu Dragan, ANIS president. He adds that this facility was one of the few measures which differentiated Romania and promoted its image as an “IT country.”

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Moreover, it directly or indirectly contributed to a boost in Romania’s attractiveness as a destination for foreign direct investments, a four-fold growth in the amount of Romanian IT exports between 2001 and 2009 and a growth in the number of employees in the IT sector from approximately 20,000 in 2001 to 55,000 in 2009. Furthermore, it helped take the local IT industry from USD 450 million in 2001 to the threefold equivalent sum (in EUR) in 2009, says Dragan.

The lack of strategy on the medium and long term for dealing with the crisis from the government and state structures will have deferred harmful effects. “Any software developer has two main sales channels: the client portfolio where there are recurring sales of services and licenses and new clients for whom you start implementation contracts. The government’s lack of strategy is leading to a standstill in investments in IT,” says Daniel Toma, general manager of Senior Software.

The market is shrinking as the crisis progresses. The only ones left to invest are visionary managers of Romanian companies who manage to turn the crisis into an opportunity for organizational and operational efficiency, or branches of multinationals that have approved multi-annual budgets and have enough resources at their disposal to win market share.

“The dramatic results will show in 5-10 years from now when Romania will not have strong producers to sell products and services with a high added value. As time goes by, we will become merely a market for developed countries,” says Toma. This means that instead of remaining in the hands of local producers, capital will travel across the borders and make foreign producers strong. This in turn will have a major impact on various aspects of the economy: from a weakened national currency to the lack of any sway in the local or regional business of IT integrators.

“We will pay for today’s mistakes tenfold in the years that follow and it will become infinitely difficult to re-create authentic Romanian capital,” Toma concludes.

Most of the money that has been spent on software products and services over the last year was from the state coffers. As a result, the majority of revenues in the software industry are directly or indirectly connected to the public sector.

“Also worth mentioning is that while a company will reel under the reduction of revenues, it will also be faced with an increase in fixed expenses. This is a lethal combination and will lead to higher pressure on profitability,” warns Razvan Bagiu, general manager and sole shareholder of CS Vision.

Others share his concerns. “The companies who relied on collaboration with the public sector need to re-think their strategy and find new business partners.

According to Toma, slashing the “zero tax” measure would have hit outsourcing companies hardest, large groups of programmers who work mainly for external developed markets. “In all likelihood, the managers of these companies would have made redundancies or cut salaries and benefits in order to meet the expense budgets and general profitability indicators,” he adds.

Rather than axing IT expenses, the state should massively invest in software. “This is the only way in which it can sustain a change in substance. The problem is that the IT system is not the solution but merely the support. Re-structuring is essentially a management action and is dependent on strategy, methodology and vision. Hesitation at the level of management and lack of vision are making IT investments inefficient,” says Bagiu.

Last year, in order to “administer the crisis” the Romanian state delayed the approval of the state budget and local budgets. The result was that projects could not be assigned until June. “This year we hoped for a more responsible approach but projects only started to be assigned in May. In all likelihood, the budgetary cuts in 2010 will block or delay very many projects. Even if works are approved, we will have delays in payment,” says Bagiu.

Meanwhile in the private sector, budgets for acquiring software have nosedived by 30 to 70 percent, depending on the activity of the respective companies. “In practice, at the moment the shopping list has to be confined to the basic necessities, which mainly means scratching specialized software products off the list,” says Gabriela Laiu, executive manager, Power Net Consulting.

This is why software companies are among the worst affected by the reluctance of the private sector to invest in IT, because specialized software is often seen as a luxury. “In this case, it is necessary for a company to start looking at other approaches than simple sales, and monthly subscriptions are an alternative for a situation of this kind. Levying new taxes can only inhibit the development of this sector which risks reaching a blockage in this way,” she says.