Silence on ESOP takes the sheen out of budget

There were mixed reactions from the software industry and the venture capitalists towards the Budget. One thing that stood out was the general disappointment on the tax being imposed on software exports and the Government’s failure to come out with anything concrete on the ESOP front. Despite the reduction in customs duties on the hardware sector and simplifying the VC process, the industry did not consider that the Government had done anything path-breaking to help the IT sector.

Vijay Angadi, Managing Director, ICF Ventures Private Ltd said it was truly unbelievable that no decision has been taken on the employee stock option plan. "There have been no clear-cut laws to make it more simplifier. I am shocked and amazed by it. The decision on venture capital funds is definitely good. But the usual glitches like misinformation from the Ministry of Finance, has to be removed. They should really start operating from a single window. Though the tax on software exporters is spread out, but the rate is high. Only one part of the IT industry is the services companies. There are product companies and companies which do research and development. IT has just started in India and if you start putting tax on this industry, it will act as a deterrent," he said.

Vikram Shah, Managing Director of Novell Software and a member of IT Task force of Karnataka, was of the opinion that the Budget was a mish-mash. "There have been good things, but there have been not so good things also. One good thing about the Budget is the simplification on the VC process. The removal of taxation on the VCs is a very good move. In fact, it has helped the entrepreneurial movement in the country. Another good thing is, by reducing the duties on the hardware components the Finance Minister has given an impetus for the Net movement in the country. By increasing the FII limit to 40 percent, the Finance Minister has helped more dollars to flow into the country. On the negative side, by bringing in the taxation, it has taken out the benefit. This is not advisable in the present scenario. If we look at the statistics, we find that 75 percent of the companies are below the Rs25 crore mark and these companies need support at this point of time. They need hand-holding and may be two to three years down the line, when 75 percent of the companies get into the higher end, it could have been done. The major drawback has been the ESOP part. It was highly desirable that a clarification was needed on the issue," he said.

Som Mittal, Managing Director, Digital Equipment (India) Limited said there was nothing unusual or dramatic in the Budget. "As far as the FII investment limit being raised, it will only have a partial impact on the industry as such. There is nothing path-breaking about the Budget," according to him.

Anant R Koppar, President and CEO, Kshema Technologies Ltd was disappointed on two fronts. "The taxation portion of the Budget will affect the smaller companies and start-ups. It is bad for Indian software industry. There has been no announcement on the ESOP front, while the industry was expecting it. The announcement on VCs has been good. It will give more impetus towards financing and allow more start-ups to come up," he said.

A J V Jayachander, President, ICICI Venture had a mixed reaction to offer. "The positive side is that with the single window clearance coming in the form of SEBI, it will lead to a hassle-free environment. On the other hand, we had asked for funds to be given pass through treatment. However, one is not very clear about it. The fund should be taxed at the hands of the investor. If an investor invests in a company, the long-term capital gains tax is only 10 percent, while the VCs will have to pay 20 percent. So, the VCs will continue to take the offshore routes like Mauritius. There has been no announcement on the ESOP front, which again is a disappointment. The Millennium Technology Fund is definitely a good thing, which will strengthen the intellectual property regime and also help in boosting the patent office. The tax on dividends is very negative and we already see that the stock market has reacted to it. The taxation on exports should have been imposed a little more gradually. As far as the sops on hardware has been offered, it is not very exciting," he said.

R. Ravisankar, CEO, CITIL, said the budget was a fairly moderate one. "The increase in ceiling for investments into international software firms is a positive move. Similarly, the reduction of customs duties on hardware would aid the company’s ASP business plans. It is a disappointment that no breaks were provided on the ESOP front" according to him.

The first reactions of Deepak Ghaisas, CFO, CITIL, of the Budget was that it was a neutral one. "There are a few positive strokes by way of reduction in customs duty on computer hardware and on optical fibres, which may be expected to fuel the growth of the PC market and the communication infrastructure. The sops being offered to VC firms from abroad will be expected to provide much needed fuel for the booming software industry in the country. On the other hand, the proposal to increase dividend tax will hit most IT companies. The lifting of exemption on software exports would mean that the advantage that was due to the software firms already in the business will not be available to the new entrants. Though it was expected that some relief would be provided on the ESOP front, no comment was made on the issue of perquisites being taxed only on sale," he said.