Beyond the Tinman Syndrome

Ajai Chowdhry
chairman and CEO
HCL Infosystems

In the Software segment, the acquisitions and mergers would definitely
get a fillip as will the onsite services have been given income-tax
benefits under Sections 10A/10B. This would support our global Software
Services business. Increased commitment from the government for use of IT
and IT consumption in the government departments and banks will help our
software and hardware businesses.

For the past few years, Indian Budgets have been plagued by the Tinman
syndrome. Try as the finance minister’s office might, the rust of coalition
governments has always managed to adhere to the cup of budgetary promise, from
which are expected to cascade a gurgling stream of pro-reform and get-rich-quick
proposals. The result–a gooey mix of half-directed measures that come out
thick and slow, cloaked in the viscosity of political compulsions. This time
around, though, Yashwant Sinha has tried to pull off the proverbial rabbit act–while
the true impact of some of his proposals will be felt only with time, the gurgle
can be heard loud and clear.

Rajendra S Pawar
chairman, NIIT

Strong enablers for higher education in the form of loans and 18% higher budget allocation for education will go a long way in developing a large skilled manpower pool.

Initiatives to grow all integral parts of the burgeoning IT industry–hardware, software and telecom–will need a continuous support from the government.

Customs duty on IT and telecom products has been slashed. Profits derived by
units located in STPs from “on-site” services are eligible for
deduction. Transfer of ownership of companies with public interest component
will not attract income tax. Five-year tax holiday and 30% deduction is to be
reintroduced retrospectively for new units. Concessions for ISPs and broadband
networks and MNCs have been unveiled. Indians with ESOPs in MNCs can invest up
to $25,000 annually overseas. IT education gets due prominence. Companies can
acquire shares in foreign units up to $100 million, or an amount equivalent to
ten times their exports in a year. The list goes on…

But there are the glitches as well, from the industry’s point of view. The
government has certainly missed the bus as far as its golden chance to finally
do something about the hardware sector goes…there are next to no benefits for
hardware companies, and nothing has been done to push hardware usage or exports.
Without any major changes in duty structures, about the only silver lining for
hardware players is increased spending from the government itself. The abolition
of the 10% surcharge on customs duty will not have much of an impact on prices.
Price reductions will barely be 1-2%, a far cry from the 25-30% reduction that
the market expected.

Dr Nirmal Jain
managing director, Tata Infotech

It is an excellent and positive Budget. The Budget is in the right
direction as the reduction in duties on the IT products and the decision
of the government to computerize the government offices will give impetus
to the domestic market. The focus on education is commendable as it will
also give a boost to the IT industry.

Perhaps Nasscom president Dewang Mehta sums up the Budget proposals for the
IT sector best. “Overall, the Budget has been growth-oriented and conforms
to the aspirations of the IT industry. The industry will be able to reach a
target of $6.24 billion in exports this year. However, there is some
disappointment in the imposition of service tax and DTA sale, and we will have
to closely examine the implications of this on domestic IT-enabled
services,” he said. The hardware sector can now only wait for the Exim
Policy and hope that proposals therein will being in some relief.

Vinnie Mehta
director, MAIT

The increased government spend on IT is very encouraging and will help
to dispense the depressed market sentiment for IT sales.

However, the market growth will not be price-cut led as there will be
only a marginal drop in prices of servers and other fully imported
high-end IT products. The gray market will continue to grow unabated as
local levies continue to remain high.

Not many have cribbed that excise duties have not been brought down, as was
expected. Answering on a chat session a day after the Budget, Sinha said:
“I have not done it for the simple reason that we have settled for a single
rate of excise. I have rationalized the structure and put in a single rate
instead, while reducing some customs duties. All products of IT have a maximum
duty of 15% and we bring them down to 0% in the next two years.”

The exemption for on-site services from income tax under Section 10A/10B and
80 HHE of the Income Tax Act is a major announcement, one that should see needed
succor being extended. On-site services constitute over 60% of the revenues
generated from software exports and in 2000-01, of the projected $6.2-billion
software exports, almost $3.7 billion are expected to be through on-site
services. Viewed in this vein, and coming as it is with retrospective effect
since last year, the new provisions will see these units show neatly fatter
bottomlines.

Avtar Saini
director, south Asia Intel

The Budget presented is forward looking with focus on infrastructure,
education. It is a manufacturer of reforms considering the proclamation of
computer networking and discipline in government offices.

The directives to increase IT spending in the departments with large
public interfaces is very encouraging.

Two-way fungibility is the other significant positive for the IT sector. ADRs
and GDRs will be provided two-way fungibility, meaning that converted local
shares may be now reconverted to ADRs and GDRs. This will be particularly
welcome for Indian software companies listing on the NYSE and Nasdaq as this
will increase ovearseas investor confidence. Also, investment in the ISP and
broadband segments of the market will get beefed up thanks to the 100% tax
holiday for startups.

Similarly, necessary impetus has been given to the education sector, with
provision for a new IIT and upgrade of other regional colleges to that status.
The education loan scheme formulated by the Indian Banks’ Association will
give students access to quality education and help India achieve its targets for
skilled manpower generation. What remains to be seen, in the long run, is
whether these professionals service Indian requirments or seek  their
forturnes overseas.

The other good news is that status quo has been maintained on some key
fronts. Industry concerns on the issue of taxes on e-commerce transactions have
been unwarranted as the concessions that Sinha had given to the software
industry in the past years have not been withdrawn. Keeping e-commerce
transactions out of the tax net is also a major plus which will result in a
growth of e-commerce activity in the country.

As has been the case for some years now, software and e-commerce continue to
be the real IT darlings for the finance minister.

Rajeev Narayan in New Delhi

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