Budget’99: A Mixed Bag

A Mixed Bag

Unlike last year
when a new government had devoted singular attention to IT, this year
round, no new precedents were set. There were mixed reactions from the

While people were
still wak-ing up to the provisions in the budget, some of the initial
reactions were of cautious welcome. "This could be considered a
good budget for the software industry. The Section 80 HHE of the Income
Tax Act, which exempts earnings from software exports, has been retained.
Mergers and acquisitions have become tax neutral. The reduction of capital
gains tax from 20% to 10% will also help the software industry, which
is already doing well on the bourses," says Mohan Khanna, General
Manager, Marketing, ICIL. Dewang Mehta, President, NASSCOM, adds, "With
continuation of Section 80 HHE, we are confident that, during 1999-2000,
India’s software exports will cross Rs17,500 crore and thus result in
another year of 50% growth in software exports."

The Income Tax Act will be amended to allow a weighted deduction of
125% of the expenditure made on in-house R&D up to March 31, 2005.
This will give fillip to companies to invest in corporate tools to improve
productivity and will result in more software products and packages
coming out of the country.
Rajendra S Pawar, Vice Chairman and Managing Director, NIIT, observed,
"The setting up of a National Foundation for Innovation and encouraging
R&D by extending the weighted deduction of 125% by companies is
a landmark step toward making India a net creator of technology. It
particularly recognizes the potential of the knowledge-based industry
like information technology in creating intellectual property."
NASSCOM has also welcomed the Finance Minister’s decision to include
computer software under Section 35 2AB of the Income Tax Act. Mehta
states, "This will give a boost to R&D and software product
development in the country, as software products and packages initiatives
will get 125% weighted income tax deduction till 2005."

Television software export has been brought under Section 80 HHC. Another
feature which is beneficial to the economy as a whole will be the provision
to treat expenditure undertaken to become Y2K compliant as revenue expenditure.
This provision will ease it and ensure more Y2K solutions’ sale at home.
However, Ranjan Chopra, MD, Team Computers Pvt Ltd, wonders, "I
am not sure if this holds for Y2K hardware solutions as well. It would
be great for us if that is so." Sekhar Dasgupta, Country Manger,
Oracle Software India, observes, "We are delighted at the Y2K incentive
given by the government to the corporates. This is a necessary step
in the right direction." Agrees Ajai Chowdhry, President and CEO,
HCL Insys, "We welcome the government’s initiative toward encouraging
Y2K compliance. In fact, this will surely provide a boost to the overall
demand for IT products and services in the coming year and will contribute
toward making India an IT superpower."

While Finance Minister Yashwant Sinha proclaimed himself to be against
the zero duty regime, software industry sighed in relief as software
continues to be exempted from duty. Mehta says, "This is a software-friendly
budget, it proves the sincerity of the government to give thrust to
the software-driven IT sector in the country. Continuance of zero duty
on software will help restrict the software price in the country."
The government’s decision to exempt computer software from the purview
of Service Tax is yet another welcome announcement.

Mohan Khanna, GM, ICIL, points out, "The step to restore MODVAT
credit to 100% is a step in the right direction." Concurs Chowdhry,
"The Union Budget has further encouraged internal liberalization
with the increase in MODVAT allowance to 100%."

Customs duty has been cut from seven to five slabs. Telecom has got
a leg up through reduced import duties on telecom equipment and optical
fiber. And the government has taken the little-noticed but potentially
consequential step of recognizing electronic records as valid documents.

Hard on hardware
The jarring note in all this euphoria in the post-budget period has
come from the hardware industry. Vinnie Mehta, Executive Director, MAIT,
observes, "It’s been a disappointing and insipid budget. It simply
has not referred to any recommendations of the hardware panel of the
IT Task Force. It seems the duty on finished products will go up by
20-25%. But the WTO maximum slab is 22%. Parts and components that attracted
a duty of 10% will now attract 15% and there is a 5% surcharge on microprocessors,
which would imply that finished goods will cost 3-5% more. As a result,
the gray market will thrive. The duty on micro assemblies, storage devices
and CD ROMs will be reduced to 5%, but these were already at this level
roughly. There is absolutely no reference to the abolition of the Special
Additional Duty. Since duties have gone up, the differentials with other
markets will go down and India will lose its competitive edge in the
international market."

Mehta, however, adds, "Restoration of MODVAT credit and reduction
on interest rates on post-shipment credit from 13-15% to 7-8% will help
exports, but it is disappointing to see that the reference to IT was
so muted in the budget."

Echoing Mehta’s concerns, Sanjeev Keskar, Country Manager, National
Semiconductor, opines, "In case of the IT industry, the budget
is very good for the software industry but for the hardware industry,
nothing special has been done."

The budget clarifies issues pertaining to ESOP, venture capital, service
tax and R&D. The Finance Minister has clarified that capital tax
is only applicable at the time of sale of securities and that it will
be divided into two components-that of perquisite and capital gain.
Sinha also announced measures to regularize the venture capital environment
in the country, by relaxing the requirements for time-bound investment
and minimum lock-in-period of funds.
On the flip side, ESOPs will be taxed in the hands of employees as perquisites
and there are no sops for venture capital. The budget does not promote
computer penetration. Even in the software area, some of NASSCOM’s recommendations
such as raising the tax holiday from five years to 10 years under Section
10A/10B of the IT Act have not been accepted. Neither have venture capitalists
been allowed to set off losses in one invested company against profits
in another invested company during a specified block of years.

in New Delhi.

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