Post-Budget Analysis: Great Expectations...Come to Naught

If the views expressed by two of the leading IT companies,
Infosys and Wipro, are anything to go by, the budget has not been received very
well by the IT industry. Sounding clearly disappointed, Kris Gopalakrishnan,
president, joint MD and COO, Infosys Technologies, says, "IT industry
deserves better and overall the budget does not have anything positive for the
IT sector." Wipro is equally dissatisfied with the budget. Talking about
the imposition of minimum alternate tax (MAT), Wipro chief financial officer
Suresh Senapaty says, "We think this is a retrograde step in the sense that
the sector has already been given tax holiday till March 2009." He also
said the government's proposal to bring employee stock options plan under
fringe benefit tax was "unfortunate". Kiran Karnik, president of
Nasscom, says, "From the IT point of view, there is no high point in the
budget at all." The mood was also visible in the stock market with BSE
Sensex sliding 540 points. IT stocks of all the large IT companies witnessed a
downward slide. TCS stock was down 6%, Infosys 5%, Wipro 7.34%, HCLT 10% and
Satyam 9.8%. But, there were some positives. The finance minister earmarked Rs
33 crore for manpower development and increased allocation for e-Governance. The
service tax exemption to all services provided by technology business incubators
is also a welcome step.

Industry Reactions

Kiran Karnik, president, Nasscom: From the IT point of view, there is
no high point in the budget at all. There is a great concern about MAT being
introduced out of the blue. We were looking at zero tax regime going into 2009.
Our discussion was to extend that further by 10 years in the light of the
changed situation. This will specially hit the smaller companies whose margins
are low and those in export business are export focused. They are in fact paying
zero tax now, but with MAT coming in they are going to be badly hit. Also, the
service tax on lease accommodation will also hit small companies because they
don't own their premises and run operations from hired premises. The tax will
mean a big increase in overall cost for them. On the venture capital part, it
looks positive but it is actually not because the pass through provision exists,
and what has been done now is that pass through has been remitted only to
certain specified areas and BPO is not mentioned specifically.

Sivakumar Ramamurthy, MD for South
Asia, Intel: The budget is consistent and directional, and will provide the
right fillip to the Indian economy. We welcome the 1% reduction on CST. I think
MAT will not have any major impact. The software companies have matured from
what was once a sunshine industry.

Deepak Ghaisas, CEO, India
Operations and CFO, i-flex solutions: Most IT industries are already paying
tax, but the imposition of MAT on the IT industry would negatively impact those
SME enterprises who are not paying any tax. However, this budget, from a
long-term perspective, provides positive incentives to increase investment in
the education system, both in secondary and higher education. The planned
increase of expenditure on e-Governance is a good signal for the IT industry. It
will serve to expand the domestic market and IT companies will see government
spending coming their way. However, from the short-term perspective I believe
the budget provides debits and no credits.

Manoj Chugh, president, EMC, India
and SAARC: The FM's budget speech reinstates the industry's confidence
in the government's thrust on reforms and investments to accelerate the pace
of overall economic growth. The focus on e-Governance, education infrastructure
development and innovation through higher budgetary allocations is a positive
signal for the technology sector. These steps will provide further impetus to
information infrastructure and technology spend in the country as well as
augment talent creation in the IT services industry, thus supporting its
long-term growth. Additionally, the spotlight on R&D in the technology
sector will help drive IP innovation in the country.

Ramesh A Vaswani, Exec Vice
Chairman, Intex Technologies, India: I consider it as a lackluster budget.
It addresses concerns which will get resolved by the measures and initiatives
announced not in the coming year, but over a five-year period. Having recognized
that manufacturing has been a main driver of growth no new initiatives were
announced. The renewed focus on agricultural growth augurs well for sustainable
high growth rates. The emphasis on rural development, vocational education,
scholarships for encouraging secondary education amongst SC/ST students will
play a substantial role in ensuring inclusive growth and providing skilled
manpower for industry and services."

Ranjan Chopra, CMD, Team Computers:
Chidambaram's Budget 2006-07 is insipid. The reduction in CST by 1% is good
news. The FM should have removed the draconian Fringe Benefit Tax, because of
which we have been paying tax on genuine expenditure. But the FM disappointed us
by only excluding expenditure on free samples and on displays from the scope of
FBT, which is insignificant. There has been no relief given to the corporate
sector.

Ninad Karpe, MD, CA India and SAARC:
Budget 2007-08 is more focused towards agriculture, healthcare and
education, however this budget has given e-Governance its due diligence. State
governments across the country have realized the benefits e-Governance has to
offer. Currently, India is on the road to enable efficient governing processes
with the central government's support of additional Rs 200 crore. This clearly
gives a boost to e-Governance initiatives across the country. This spend will
not only improve services to citizens, but create a ripple effect in the
domestic IT industry and may lead to mushrooming of the domestic IT spend. Also,
the proposed Rs 33 crore for a new scheme of manpower development for the
software export industry is a definite positive.

Alok Mittal, executive director,
Canaan Partners: There is a pass-through status for venture capital (VC)
investments in research in new chemical entities, dairy, poultry, bio-fuels,
biotech, IT, and nanotechnology. Minimum Alternate Tax (MAT) has been extended
to IT companies; IT companies to pay 11.22% of adjusted book profits. The
e-Governance allocation is to be increased from Rs 395 crore to Rs 719 crore.
This will enable greater efficiencies in government administration, improved
citizen-government interaction and a positive multiplier effect on the pace of
IT adoption in the country.

Gowri Shankar Subramanian, CEO,
Aspire Systems: The budget is more of an attempt to maintain the status-quo.
Given the positive economic conditions, it seems more could have been done. It
includes populist moves such as slight enhancement in income-tax exemption
limits and removing the surcharge for SMEs.

S Mahalingam, chief financial
officer, TCS: For the Indian software industry, which the PM recently
described as the torch-bearer of India's image in the world, the introduction
of MAT has re-booted the assumed benefits that this sector was to enjoy until
2009. Not only has the wealth generated by Indian IT been widely distributed,
but has also generated over a million highly-paid skilled jobs, thus help build
the nation's physical and human infrastructure. The IT industry does pay tax
in other geographies currently, but it remains to be seen whether the MAT burden
can be offset to some extent. The FM has delivered a budget that will fortify
India's long-term economic growth ambitions by providing a foundation for
agriculture and the social sector. He has increased outlays on health and
education through focused programs like funds for finishing schools for
graduates, upgrading vocational education, as well as the additional cess to
fund secondary education.

Parag Patankar, chief operations
& technology officer, Development Credit Bank: The budget laid emphasis
on controlling inflation while channeling investment in core sectors like
agriculture and infrastructure development besides further rationalizing duty
structures. For the IT sector, there were some negatives including extension of
MAT to cover income in respect of which deduction is claimed under sections 10A
and 10B of the Income Tax Act; introduction of FBT on ESOPs and an increase in
dividend distribution tax for corporates.

MAIT: We
welcome the thrust given in the Union Budget to sustaining the national economic
growth and making it inclusive. Further, the industry body has expressed
satisfaction over the government's announcement of several schemes towards
promotion of education especially among the socially and economically backward.

We welcome the government's decision to maintain the current
excise and custom duty levels on IT products. The hardware industry supports
long-term stability in policies and duty structures as frequent changes could
adversely impact the investment and business plans of the industry.

Ashank Desai, non-executive
chairman, Mastek: With regard to the IT sector, the Budget has come as a
mixed bag. The increase in allocation for e-Governance measures is commendable
and should result in benefits for both the sector and the nation as a whole in
the long run. At the same time, we believe that extension of MAT to companies
that had earlier been promised 10A and 10B exemptions is likely to have an
adverse impact on certain players. In addition, the inclusion of ESOPs under FBT
will add to the challenges being faced by employers in knowledge-intensive
industries in attracting and retaining world-class talent.

Jangoo Dalal, president &
country manager, Cisco India and SAARC: The overall focus of the Union
Budget 2007 on faster and more inclusive growth with a spotlight on rural
development augurs well for the long-term economic development of the country.
This is a progressive and balanced budget from the economic perspective. It is
heartening to see that government is clearly committed to e-Governance, having
increased the allocation both at the center and state level, with a new scheme
for manpower development in the software export industry. Computerization
programs for the public distribution system and FCI will also enhance efficiency
and benefit the common man. The proposal to grant pass through status to venture
capital funds for undertakings in IT, biotech and other emerging sectors, and
the service tax exemption for technology business services provided by
technology business incubators and eligible incubates will further encourage
innovation and IP creation in India.

Suresh Senapaty, chief financial
officer, Wipro: We think MAT is a retrograde step in the sense that the
sector has already been given tax holiday till March 2009. The government's
proposal to bring employee stock options plan under fringe benefit tax is also
unfortunate.

Kris Gopalakrishnan, president,
joint MD & COO, Infosys Technologies: This budget is a mixed bag. On the
fiscal front, there have certainly been great improvements. Tax collections are
up, growth is up. Spending has increased for the social sector, though nothing
radical has been proposed. The IT sector is growing at a rapid pace and the
industry expected no change in the 10A, 10B regime while expecting an extension
of time frame. Obviously, this has not come across in the budget but the changes
in the budget to bring 10A and 10B companies under MAT is a retrograde step as
commitments have been made to keep the exemption going till 2009. Overall, the
budget does not have anything positive for the IT sector.

Lalit Lahoty, director, Rapidigm:The
annual budget presented by the FM has left the IT sector high and dry. The
proposed increase in Dividend Distribution Tax (DDT) from 12.5% to 15%, is
damaging for the Indian IT sector that is already loosing FDI service tax and
has now been levied on commercial rent. The proposal is very damaging for IT
sector as bulk of software companies operate from leased premises.

Raju Vegesna, chairman and CEO,
Sify: Overall, it is a growth budget focused on development of agriculture,
better standards and quality of life in rural areas, urban infrastructure, power
generation, investments, health, education and vocational training to increase
employability. The government has retained the course to ensure socio-economic
development and continued high growth, instead of resorting to populist
measures. The measures to encourage small-scale industries as well as venture
capital funds being given a pass through status are also welcome steps towards
ensuring continued high growth of the economy.

Sudesh Prasad

sudeshp@cybermedia.co.in