Budget'99: A Mixed Bag

Budget'99:

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

industry.

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.

DIPANKAR DAS,



in New Delhi.