"Honorable FM, we're not happy!"

Lalit Lahoty

Dwarfing all items represented on the IT industry's list of budget expectations this year, was the extension of tax holidays available to software and ITeS (IT enabled services) exporters registered under the STP (software technology park) scheme beyond the year 2009, to bring the tax benefits on par with those available to SEZ (special economic zone) units. The same has not been addressed at all.

Additionally, a provision to impose minimum alternate tax (MAT) to IT companies is going to hit the IT companies hard. It effectively means that there would be no deduction on account of exempt incomes under these sections from book profits for the purpose of computation of MAT. Even the effective rate of MAT has been raised from 7.5 per cent to 10 per cent. The proposal is very discouraging.

Increase in DDT

Dividend Distribution Tax (DDT) has been raised from 12.5 per cent to 15 per cent. The proposal is damaging for the Indian IT sector that is already losing foreign direct investments to other emerging markets. DDT should have been scrapped as it is in the nature of double tax on the same income, first in the form of corporate tax and second, in the form of DDT on the amount distributed in the form of dividend.

Increase in the DDT effectively raises the corporate income tax rate. Foreign investors would shy away from Indian corporate sector with such proposals.

Service tax on commercial rent

Service tax has now been levied on commercial rent. The proposal is very damaging for IT sector as bulk of software companies operate from leased premises. They also hire on rent residential accommodation for their outstation employees. The proposal is likely to inflate the overall cost of operations quite significantly.

The finance minister has announced the allocation for education to be enhanced by 34.2 per cent. However, the education system needs more help then what has been provided.

Today, our academic system is not at all market responsive. We see a talent shortage of 500,000 by 2010. Our system is what the British left us 60 years ago. We perhaps need radical changes into our education system. We need lot of investment into it and perhaps a good public-private partnership model is a requirement of the hour. Today, China with 1.3 billion population, has 1300 universities and with a strong 1.1 billion Indians, we just have 350 universities!

Nothing substantial has been done to increase qualitative investment into infrastructure. China spends 9 per cent of GDP on infrastructure, India 4 per cent. One per cent additional investment means an increase of $75 billion. Further, an increase in investment always have a multiplier effect -for every rupee invested, Rs 4 of GDP is generated.

The provisions in the budget have left lot to be desired and we wish the Honorable finance minister would have a relook.

(The author is director – Rapidigm - a Fujitsu Consulting Company. The views expressed here are personal).

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