Software industry faces Krishna's music in silence

If the industry is unhappy with the recent sales tax imposed on domestic

software sales by Chief Minister SM Krishna, it has managed to hide its

disappointment very well. Or, has it decided to face Krishna’s music in

silence?

Not a single whimper of protest came from the local industry at the budget

proposal. Contrast this with what happened during the run-up to the central

budget. The whole nation backed the software industry when it raised hell at the

possibility of being taxed. While the industry is stewing over, the state

government representatives of the IT industry–the IT minister and the IT

Secretary–are in Hanover, Germany, participating in the CeBIT conference and

trying to woo international investments to the state.

"It’s a surprise that Karnataka, in spite of being promoted as a

software hub, is planning to tax the domestic software market. It is definitely

not a sensible move considering that all the leading software companies focus on

the export market and that’s where the money is. This will have an impact on

businesses like banking, insurance and financial services, which are

aggressively working towards becoming more tech savvy and exploring the

possibilities of having centers in Bangalore. This move (of imposing ST on

software products) will have a negative impact on it," says Cognizant

Technology Solutions, Bangalore Center, director, Kalyan Mohan.

While Finance Minister Yashwant Sinha spared the industry, the Chief Minster

of Karnataka, who also holds the finance portfolio, has given a toughie to

software and Internet related services.

A sales tax of 4 per cent has been imposed on computer software, including

leasing of computer software, in its budget for 2001-02. The budget has also

proposed an annual tax of Rs 2,500 crore on mobile phones service, Internet

service, Internet cafés, information kiosks and e-commerce.

So what could be the possible repercussions from the announcement?

"Naturally, prices will be raised by the vendors," says SAP India

director, marketing and alliances, DV Jagdish. "Revenues will not be

affected, but the percentage of its growth will be insignificant. But for the

tax, the growth could have been better."

Tally Solutions managing director Bharat Goenka says, "The growth of

software products will slow down in Karnataka with the tax imposition. Vendors

would be driven to set up shops in other states. We may witness something

similar to what happened to the hardware industry, which set up offices in

Pondicherry to get tax sops."

Amidst all this gloom, vendors are still not clear as to what and who will be

taxed. Will the ISPs also be taxed? After being slapped a service tax of 5 per

cent by the central government, an additional 4 per cent tax is the last thing

they could have wished for. For it will not only kill market penetration, but

may spark off another price war.

Similarly, slapping sales tax on Internet cafés, information kiosks and

e-commerce has taken many by surprise. As all these industries are at a nascent

stage, the state cannot seriously think in terms of getting big returns from

them to the state treasury.

Imposing tax on the domestic software market will not only reduce growth rate

and increase piracy, but may also keep the MNCs away from the state. This in

turn will put a cap on investments, job opportunities, technological

advancements and innovations, which had so far come easy to Bangalore, which is

promoting itself as the IT capital of the country.

Admittedly, the Chief Minister has been earnest in his support for the IT

industry, going all out to woo international investments. However, when it comes

to other related issues, like power cuts and poor infrastructure, the state has

been more than indifferent. Time for the Chief Minister to sit up and take

notice?