Mixed Bag of Tricks

The first year of the new millennium has been a year of turbulence and

tragedy. Early in the year, the devastating earthquake in Gujarat caused

devastation and massive havoc. On the economic front, the year began with news

of the slowdown in the US economy. World economic growth slowed down to 2.4% in

2001, after seven consecutive years of high growth.

Amid

this bad news, the Indian IT software and service industry continued to show

robust growth and demonstrated its ability to survive in a tough business

environment. This is indicated by the steady growth in IT revenues from $8.3

billion in 1999-2000 to $12.2 billion in 2000-01. In 2001-2002, the Indian IT

industry is estimated to account for revenues of $13.5 billion and contribute

towards 2.87% of India’s GDP.

Given the present economic situation, Indian industry was looking forward to

assistance and assurance from the government to bring about a revival–no

imposition of fresh taxes and continuation of incentives announced over the last

few years. But the Budget proposals for 2002-2003 provide a mixed message for

the IT sector. At Nasscom, our concerns are the inconsistencies in the tax

regime, as these are likely to hamper India’s competitiveness in global

markets.

At

a time when most companies are already experiencing low profitability margins,

the bringing down of tax exemption under Section 10 and 10 from 100% to

90% will have a negative impact on the software industry. The industry was made

to believe that the 100% deduction would be available till 2009, and thus

investments were made based on this premise. Even if the provision is valid only

for the coming financial year, such taxation inconsistencies will lead to

erosion of overseas investor confidence in the Indian software industry in the

longer run.

The software industry is also disappointed with the continuation of

Sub-section (9) (under Section 10 and Section 10). Under this, if more

than 51% of shareholding (beneficial interest) changes in a 100% EOU, STP or EPZ

in a given year, the company will cease to get I-T exemption.

On the hardware front, the industry expected initiatives to reduce PC prices,

leading to an increase in PC penetration and the overall rate of investment in

the economy. This would largely be achieved through cuts in customs duties,

taxes and other local levies. While the Budget does have some good news for the

hardware industry–zero-duty regime on IT products to be effective only from

2005 and reduction in the customs duty to 5% on hardware components–this is

not expected to have much of an impact on the hardware industry. This is because

the marginal decrease in prices will be offset by additional taxation

surcharges. For the software side too, initiatives such as opening more STPs and

SEZs, an increased allowance of $50 million given to Indian companies to set up

operations, and the easing of limits on Indian companies to be able to invest in

foreign companies to form joint ventures is positive… but the imposition of

tax on software will have an impact on the level of investment.

The software industry has contributed tremendously to the overall growth of

the Indian economy in terms of creating jobs, wealth and sparking new ideas to

fuel the knowledge business. To achieve a 30% growth in this current market

scenario is no mean achievement and deserves to be lauded, not burdened with

bottlenecks that hinder future growth. The government should not create

roadblocks that hamper the ambition of the industry to reach the exports target

of $50 billion.

We at Nasscom urge the government to continue its commitment of ensuring that

the software industry is not taxed till 2010, and withdraw the new imposition of

tax. It is critical that the government sends out positive signals both in the

domestic and global view, in order to spur demand in these trying times.

Phiroz Vandrevala



Nasscom chairman and vice-president, TCS