Minimal Impact For IT

NEW DELHI: Like every year, the budget has its share of admirers and cynics. The same has been the case in the IT industry.

The biggest catch for the software exporters has been the levy on the corporate tax. Though there had been talks about the same for quite some time but a majority of the industry and NASSCOM was against the imposition of the same. However, the Finance Minister was in no mood to oblige this time around and has started with a small tax on all export earnings. The budget has announced that no longer 100 percent of the export earnings would avail tax deductions but progressively reducing by 20 percent each year and bringing it to the zero level by the end of five years. So software exporters would be paying tax on 20 percent of their export profits and taking the current corporate tax of about 38.5 percent, the net tax liability would be around 7 per cent.

This was against Nasscom's recommendations of allowing the zero duty regime for software companies. Comments Lakshmi Narayan, President & COO, Cognizant Technology Solutions, "This move doesn't support the aggressive moves made, considering the growth potential of the industry." Agrees Anurag, Director, Indiacapital.com, "In the short term and the stock market perspective, it is going to be very disastrous to levy taxes on exporters." Comments an investment analyst quoting anonymity, "For those companies already paying taxes, the impact would be to the extent of 2-3 percent but for non-tax payers, it would be to the tune of 7 percent."

Another important expectation software majors had was about the raise of $ 100 million cap for outside acquisitions. Though the Finance Minister made a positive mention of the same but gave no indications of what the final figure would be. Says, Ketan Mehta, Director, Mastek, "We expected the $ 100 million ceiling for software companies to increase but apparently it has not been increased. I would say that this is somewhat negative."

However, from the stock market perspective the decision to increase the FII limit from 30 to 40 percent did raise the morale and pumped the Sensex by about 150 points before the bad news of software exports came in. Agrees Dewang Mehta, President, NASSCOM, "There are already many FIIs who are lining up to buy shares of infotech companies and the increased 40 percent limit would help the industry."

Also the Finance Minister made no mention of the industry's demand of the taxation on ESOP. Comments Dr V Chandrasekaran, MD, Pentamedia Graphics, "That there was no announcement on ESOP, that the industry has been awaiting, has been a disappointment."

On the hardware side, the Finance Minister had much more to say. First was the change in the structure of customs duties in many of the hardware components. Also was the rationalization of the excise duties to a single CenVAT duty of 16 percent. According to Vinnie Mehta, Director, MAIT, "The budget will increase the duty differential between finished goods and imported components and this will foster local manufacturing." Agrees Balu Doraisamy, MD, Compaq India, "The budget will provide an advantage to those assembling and manufacturing systems within the country." However, Somnath Chaterjee, Secretary General, ELCINA, differs, "The local manufacturers are not excited about the budget. We were expecting a package but the Finance Minister has offered on piecemeal basis." He further adds that to foster local manufacturing the government have been promising the implementation of the hardware panel reports but not even minute tinkering has been done with the same. Also capital goods have not been touched by the budget which could promote local manufacturing. Also the duty cuts are not going to translate huge gains for the customers as the price of fully imported system will be marginally affected by about half a percent and that of locally manufactured by about 3-4 per cent. Agrees Ravi Aggrawal, VP, HP India, "There is not much difference going to be in the price level of the final product but it could bring in some problems for the grey market players."

However, the extension of SAD on traded goods offset the reduction in duties, and there is not much change expected in these prices. Comments Raj Saraf, CMD, Zenith Computers, "The impact on trading companies which at present comes under the SAD will not be much since duty for many components has been reduced to zero." Differs Manish Aggrawal, Director (Marketing), Vintron Informatics, "We welcome the fact that the Special Additional Duty (SAD) has been extended to the traders as well. Apart from everything else, this will help us manufacturers in improving our bottomlines."

The budget also announced the rationalization of the excise structure from the previous three levels of 8, 16 and 24 per cent to a single 16 per cent CenVAT. Says Gopal Srinivasan, MD, TVS Electronics, "It used to be a lot of un-productive work that was going on earlier, all of which is eliminated by this simplification."

However, this is not going to affect the industry. On the other hand, it is going to nullify the reduction in custom duties to some extent. Agrees Saket Kapoor, Director, Computer Vision, "But the fact that the excise duty has been raised to 16 percent flat, will to some extent nullify the reduction in the customs duty."