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[A] and 10[B] 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[A] and Section 10[B]). 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

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