Budget 2000-01: Business As Usual

Budget 2000-01: Business As Usual

Like every year, the budget has its share of admirers and cynics. Even in the IT industry, the general feeling has been that nothing dramatic or path-breaking happened in
FMspeak. 

The biggest issue
for software exporters has been the levy on corporate tax. Though there had been
talk about it for quite some time, majority of the industry as well as Nasscom
were against the levy being imposed. However, the Finance Minister was in no
mood to oblige them and started with a tax on all export earnings, including
that of IT companies. The minister also announced that exports could no longer
avail tax deduction for the entire earning but progressively reduce by 20% each
year, bringing it to zero by the end of five years. So at 20%, and taking the
current corporate tax of about 38.5%, the net tax liability would be around 7%.
This is against Nasscom’s recommendations of allowing zero duty for software
companies.

Commenting on the budget, NR
Narayana Murthy, President and CEO, Infosys, says, "We expected that custom
bonding, which reduces the velocity of business, would be removed." Adds
Suresh C Senapaty, VP, Finance, Wipro Corp, "The not so good things are
subtle changes in the tax rates, particularly in such areas as direct taxes,
dividends and non-withdrawal of surcharge. These are not in line with a stable
tax regime, which the new generation finance ministers have been
promising." Comments Anurag, Director, Indiacapital.com, "In the short
term and in the stock market perspective it is going to be disastrous to levy
taxes on exporters." Agrees Saurabh Srivastava, Executive Chairman, IIS
Infotech, "I believe it is a huge mistake to tax the software and services
industry at this time and an even bigger mistake to remove the entire exemption
over five years." Deepak Ghaisas, CFO, CITIL, was more forthcoming. He says
the lifting of exemption on software exports would mean that the advantage which
was due to software firms already in the business will not be available to the
new entrants. Vikram Shah, MD, Novell Software, also criticized the budget as a
mish-mash. "Introduction of tax on export income for the industry is not
desirable at this point of time where the industry is just beginning to acquire
momentum," he says.

However, an analysis shows that
the impact on the industry is going to be minimal in the first two years as
companies earning from the STP zone will continue to avail tax exemptions.
Presently, about 80% of revenue in the industry is generated by the top 20% of
companies, located in the STP zones. However, the important question in the
industry is what impact the tax will have on the smaller players which
contribute only about 20% of the revenues. One will have to wait and see.

Another important expectation
that software majors had was the $100 million cap for overseas acquisitions
would be raised. Though the Finance Minister made a positive mention of the
same, he gave no indication of what the final figure would be. Says Murthy,
"Our request for enhancing the upper limit of $100 million for acquisition
of companies overseas through stock-swap has not yet been addressed."
According to 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."

From the stock market
perspective, the decision to increase the foreign institutional investor’s
limit from 30% to 40% did raise the morale. The Sensex shot up by about 150
points before the bad news on the software exports front came in. "The
steps announced for easing venture capital (VC) financing and enhancing the FII
limits are welcome," says Murthy.

Also, the Finance Minister made
no mention of the industry’s demand that ESOP should be taxed only at the time
of sale of the shares by the employees. Says Rajeev Arora, CMD, Datapro,
"Not directly addressing the issue of ESOP is certainly one of the negative
features of the budget." Vijay Angadi, MD, ICF Ventures, was shocked by the
silence on ESOP. Welcoming the decision on VC funds, Angadi says, "Sebi
should really start operating as a single window." AJV Jayachander,
President, ICICI Venture, also welcomed the single window clearance proposal.
However, he remarks that the funds not being given the pass through treatment
will force VCs to continue routing its funds through the Mauritius route.

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. The excise duties were also
rationalized to a single CenVAT duty of 16%. 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." According to Arun Thiagarajan, Vice-Chairman, Wipro Corp,
"The introduction of single rate of CenVAT and simplification of excise
rules, if implemented properly, would make life simpler for the
manufacturers." Agrees Balu Doraiswamy, 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 it only on a piece-meal basis." Capital goods have not been
touched by the budget, which could promote local manufacturing. Also, the duty
cuts are not going to translate into huge gains for the customers. The price of
fully imported systems would be only marginally affected–by about 0.5%–and
that of locally manufactured by about 3% to 4%. Agrees Ravi Aggrawal, VP,
Hewlett-Packard, "There is not going to be much of a difference in the
price level of the final product, but it could bring in some problems for the
gray market players." However, the extension of special additional duty
(SAD) on traded goods will offset the reduction in duties, and there is not much
of a change expected in these prices. Comments Raj Saraf, CMD, Zenith Computers,
"The impact on trading companies, which at present comes under 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 SAD has been extended to the traders as well. Apart from
everything else, this will help us manufacturers in improving our bottomlines."
The anomaly regarding SAD, which was earlier payable only by manufacturers and
not traders, has been rectified, says Thiagarajan. "However, due to DEPB,
the benefit to manufacturers will reduce, if not disappear," he adds.

The excise structure also has been rationalized–from
the previous three levels of 8%, 16% and 24% to a single 16% CenVAT. However,
this is not going to affect the industry. On the other hand, it is going to
nullify the reduction in customs duties to some extent. Agrees Saket Kapoor,
Director, Comnet Vision, "The fact that the excise duty has been raised to
16% flat will, to some extent, nullify the reduction in customs
duty."