Could the state stimulate the IT sector?

By law no. 571/2003, the Romanian state aims to boost the development of the IT sector. After 18 years, under pressure from the European Union, the government has assumed the elimination of tax inequalities between different professional categories. In the IT industry there is a state of dissatisfaction with the loss of this „right”. However, there are other tools that could support the development of the domestic IT sector. For example, a venture capital fund could be set up to finance local start-ups.

How could the state stimulate the IT sector? Romania has assumed before the EU to eliminate the differences in the tax regime between different socio-professional categories. Knowing this information, the category that comes to mind the fastest is that of IT professionals. The programmers benefited for 18 years, by the law 571/2003, from the income tax exemption.

The income tax exemption failed

The income tax exemption should have contributed to the development of the sector and even if the sector has developed and, according to extremely optimistic estimates, contributes more than 7% to the formation of GDP, I would not be wrong to say that the law has failed the goal. We have dealt with this subject before and we do not want to insist too much. However, we can make two observations related to this law and the role of IT in the formation of GDP.

Romanian IT does not really represent 7% of GDP, because a large part of that percentage belongs to the developed telecom industry in Romania. It is immoral for programmers to claim the performance of another sector and, on this basis, to benefit from tax advantages.

The purpose of the law was to support the formation of a high value-added sector and, unfortunately, it largely failed. It has been 18 years since law 571/2003 came into force and the law did not produce the expected effects. The best evidence in this direction is that there are very few Romanian IT companies that are relevant regionally or globally. The law cheapens the cost of specialized labor, but this does not help much to local entrepreneurs, who are poorly capitalized. These advantages favor the large companies from abroad that have outsourced some of their services here. Basically, Romanian IT could be defined as a sector with outsourced production in which not much added value is produced.

Modern tools would be more appropriate

Today, however, there are more suitable tools to achieve the objectives pursued by law 571. The IT sector and the formation of Romanian capital can be stimulated directly by proactive tools, closer to the market. The state could follow the example of Spain and set up a venture capital fund to finance start-ups in Romania. To establish this fund, Romania could use some of the revenues it gives up by not collecting the income taxes from programmers. 

The fund could be designed from the beginning to finance local businesses and could condition the financing by keeping the headquarters in the country for a certain number of years, by hiring a certain percentage of local programmers, etc. For its administration, the state could attract some of the specialists who have trained in venture capital funds that are already active on the local market. Compared to a simple income tax exemption, an advantage is that Romania would be co-owner in those companies.

The bankruptcy rate in the area of ​​start-ups is huge, over 90%. Statistically, out of 10 investments made by this fund, only one would have chances of success on the market. But even so, it is preferable to support the development of local capital and not outsourced services. In addition, start-ups of this kind could help to improve national research indicators. These funds could be replicated to support innovative businesses in other economic fields.

So, could the state stimulate the IT sector? Yes, but there better ways than the 2003 tax exemption.

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