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Budget 2002: Telecom upbeat; HW, SW mixed reaction

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CIOL Bureau
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Overall a modest budget presentation, Finance Minister, Yashwant Sinha had

nothing up his sleeves this time to stun the industry. It is not easy to draft

dream budgets all the time. The industry also did not have too many expectations

and was therefore happy with whatever was doled out. But the Minister managed to

rub the software industry the wrong way by choosing to tax the sector for the

first time.

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The reaction from the telecom sector has been aptly summed by Bharti

Televentures chairman Sunil Bharti Mittal, "Budget 2002 certainly has less

punchy statements and is therefore less euphoric. But it is important to notice

that it has provided directional growth."

The telecom sector was happy with a number of provisions in Budget 2002,

chief among which relates to including the sector in Section 72 A. This means

that the sector has now been recognized as an industry facilitating mergers and

acquisitions. Earlier the sector could not reap the tax benefits associated with

a merger or an acquisition.

Second, the industry is upbeat about the possibility of removing the sectoral

cap on telecom for the flow of FDI. FII investment under portfolio investment

route even beyond 24 per cent (with shareholder approval) will not be counted

towards the sectoral limits for FDI.

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This has been a standing demand from the telecom industry for some time now.

Guidelines in this regard are expected to be issued separately and if telecom is

covered under the scheme it will further boost investment levels.

Telecom is a capital-intensive segment and the country expects to attract

investment to the tune of $ 67 billion by 2010 in order to achieve a teledensity

of 15 per cent.

Adds AT&T, director Virat Bhatia, "We see a more global outlook. For

instance allowing foreign banks to set up subsidiary is all an attempt to make

funding more accessible to the industry." The industry is almost unanimous

in the thought that although there is not much hype in the budget, it has at

least given a direction to the second generation of reforms.

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The removal of counter-veiling duty (CVD) on mobile phones, be it cellular or

CDMA, has been very well received by the industry. The basic service operators

are also happy that the duty on import of infrastructure equipment has been

brought down at par with cellular, paging and Internet service providers. Says

SC Khanna, Secretary General, ABTO, "We are happy with the removal of CVD

and the duty reduction on infrastructure equipment. But we wanted duty exemption

on equipment imported to meet the universal service obligation targets."

Some concerns of the ISPs have also been addressed in the budget. Services

such as those related to provision of leased line services should expect to see

rationalization of the service tax structure. Says Amitabh Singhal, Secretary

ISPAI, "The ISPs had asked for a moratorium on the service tax for three

years in the absence of which removal of certain elements of double taxation

arising out of 5 per cent levy on some input costs was expected."

Indigenous telecom equipment manufactures can rejoice as the zero duty regime

has been shifted to 2005 from 2003. There has also been some reduction on the

inputs costs from 25 - 35 per cent to 5 per cent , and on some capital goods

from 25 per cent to 15 per cent, which should help reduce the disparity between

cost of import and local manufacturing. But the sector is not smiling.

"There are hardly any items in the list of input items that could benefit

telecom manufacturers," says, SK Khanna, Executive Director, TEMA.

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The software sector is moaning the imposition of the 10 per cent tax on

profit. Nasscom is worried that inconsistencies in tax regime could hamper the

country's competitiveness in global markets. In its pre-budget memorandum,

Nasscom had urged the government to maintain a status quo on the tax incentives

to the software and service sector. In April 2000, the Finance Minister had

announced a long-term tax policy in order to provide a stable policy regime for

the software and services sector, wherein the tax holiday was announced for the

decade ending March 2010.

Nasscom chairman, Phiroz Vandrevala said, "We recognize that this

provision is valid only for the coming financial year. However such

inconsistencies in the tax regime will affect the confidence of overseas

investors in the Indian software industry."

Another voice of concern was the NASMEIT (National Small and Medium

Enterprises in IT) Chairman, PK Sandell, "The withdrawal of the exemption

tax will affect the growth of the SME particularly in a difficult year when all

resources are required. The least that could have been done was to provide a tax

holiday till 2005."

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Nasscom is also disappointed with the continuation of sub-section (9) under

Section 10(A) and Section 10(B).

As per this clause, if during the year, more than 51per cent of shareholding

(beneficial interest) changes in a 100per cent EOU, STP, EPZ then company will

cease to get income tax exemption from that year. This provision adversely

affects the ability of companies to raise funds either from capital markets or

venture capitalists.

Nasscom president Kiran Karnik says, "It hits all companies especially

SMEs and start-ups in software and ITES space, where the shareholding pattern

may change with the exit of venture capitalists. This may constrain venture

capital funding. Moreover, this provision is acting as a deterrent to mergers

and acquisitions, which is today seen as an important step for future

growth".

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