Precariously Balanced

This years budget is unanimously being called populist. IT companies in
India too seem to agree with the common view that Budget 2008 is not for the
Dalal Street but for the common man, in the real sense; a budget for a farmer
as much as a corporate employee. There is also no denying the fact that the
budget would have a positive impact on the IT industry, albeit indirectly. With
the tax relief given under the new slab, affordability of the common man will
increase, pushing consumerism.

Industry opinion leaders believe that fund allocation to the tune of Rs 350
crore toward e-governance initiatives would be a boom for the industry in the
coming years. But barring that, the budget has not been applauded by the ITeS
sector, with major expectations left un-addressed. The inclusion of employee
stock option plans under the Fringe Benefit Taxignoring the industrys demand
for removalmight be debilitating to overall growth. The counter-productivity
that the MAT imposition on the IT industry may cause, and the possible increase
in the cost of IT, thanks to levying 12% service taxes on customized software
and higher excise duties, have raised some serious concerns, the SMBs,
especially, being at the receiving end.

e-Gov on the Priority List

The IT sector is jubilant as far as the allocation of funds to e-governance
initiatives are concerned. The government has shown its keenness on bridging the
urban and rural digital divide. Sanctioning one lakh broadband connections in
rural areas, allocations of Rs 75 crore for common services centers and Rs 275
crore for state data centers will take the benefits to the grass root level.

The government has also giving impetus on infrastructure development like
power and construction of roads, rural development, healthcare and employment,
with a promise to build an environment for balanced growth. All the above e-gov
initiatives will eventually make the domestic market attractive for the IT
industry.

S Mahalingam, CFO and ED, TCS, says, The budget has highlighted the big
opportunity for IT in the domestic market with the decision to allocate
additional funds towards the state wide area networks, common service centers,
data centers as well as smart cards for benefits management like PDS scheme at
the state level.

He is also happy that the budget has payed attention to infrastructure
development. The Rs 14,000 crore Rural Infrastructure Development Fund, emphasis
on rural roads, etc, would strengthen the much needed tertiary backbone of the
economy and create greater global confidence in India. According to Mahalingam,
this would also go a long way in ensuring inclusive growth to spread the
benefits of prosperity to wider sections of the society.

Krishan Dhawan, MD, Oracle India, says, Given the positive growth trajectory
rate, there was no need for a dramatic change in the budget. It is good to see
the fiscal deficit under control. I would first like to congratulate the finance
minister for boosting the share of education and healthcare, both essential for
overall development. Proper training and skill sets need to be imparted to our
youth, if India is to attain and maintain top rank in the global digital
economy. The increased budget allocation for e-governance at the center and
state levels is a step in the right direction.

Moon B Shin, MD, LG Electronics, says, Budget 2008 would result in the
upliftment of the economy, as steps have been taken towards improving the
lifestyle of farmers. This would further create additional markets, which is an
encouraging sign. This budget will provide an impetus to inflation control.
Specific to LG India, there will not be any major changes in terms of product
pricing, as there has been no major relief in duties.

Full credit to the Honorable Finance Minister in balancing various competing requirements and making some bold announcements S Rajendran, CMO, Acer India	The budget has highlighted the big opportunity in the domestic market by allocating additional funds toward SWAN, CSC and data centers S Mahalingam, CFO and ED, TCS
Smaller companies should have been given tax relief to counter the impact of a sharply appreciated rupee. Also, increase in excise duty for packaged software will lead to increased piracy Kris Gopalakrishnan, CEO and MD, Infosys Technologies	Investment in education for not only spread but also improvement of quality is encouraging Manoj Chugh, President, India and SAARC, EMC Corporation

The Darker Side: Tax Chaos

The contribution of the IT industry to Indias economy is substantial,
especially the amount of money contributed to the government in terms of taxes
and receipts. As the decision pertaining to the STPI scheme is clouded with
confusion and the government is not opening its cards on the extension of the
scheme, entrepreneurs in the SMB segment are in a dilemma. As a result of this
they may be deprived of the concessions they are getting under the scheme.

India Inc, including the IT industry, wants the Fringe Benefit Tax to go
completely, but this year too that was overlooked. Rather, the inclusion of
ESOPs under FBT will add to the challenges being faced by the IT industry in
attracting and retaining talent. The imposition of Minimum Alternative Tax (MAT)
on the IT industry is another problem that has not been properly addressed in
the budget.

MAT would especially impact the SME that are not paying any tax till now and
constitute a large proportion of the industry. MAT would upset their business
and investment plans. Also where the IT industry was expecting a tax holiday,
MAT would prove to be counter-productive. Although the reduced tax burden has
come as a sigh of relief for most individual players, it could have boosted the
performance of the IT industry if a similar treatment was given out to corporate
taxes.

In the case of IT hardware, custom duty has been restricted to only a few
items. PC have to become more affordable to pave the way to bridging the digital
divide, and this can be achieved only by exempting all IT hardware from customs
duty. Customs duty would also lead to an unchecked growth of the grey market.

Som Mittal, president, Nasscom, says, The real disappointment is the absence
of any discussion on the extension of the STPI scheme. This is extremely
critical for small enterprises and the BPO industry, as well as for the
expansion in tier-2 and tier-3 cities, as they are unable to avail the benefits
of the SEZ scheme. The STPI benefits are available till March 31, 2009 and we
are hopeful that through continued dialog, we will be able to convince the
government to consider our proposal and help India garner the large opportunity
in this sector.

There is the other issue of imposing service tax on customized software and
higher excise duty on packaged software. This would increase the cost of IT
usage, especially in the domestic sector. The computer hardware industry would
remain unaffected, with the excise duty reduction from 16% to 14%. The supply
chain has been made simpler by the announcement of the uniform Central Sales Tax
(CST).

Shin of LG Electronics though welcomes the relaxation in excise duty, says,
For a manufacturer, as we are exposed to competition from the ASEAN countries,
some relief on raw materials and intermediate goods would have made our industry
competitive, globally.

Som Mittal of Nasscom also says that the imposition of a 12% service tax on
customized software and higher excise duty on packaged software could lead to
increased cost of IT and could slow down the IT usage in the domestic sector.
This affects, in particular, small and medium enterprises who have just started
deploying IT.

According to Kris Gopalakrishnan, CEO and MD, Infosys Technologies, The
budget has not been positive for the IT industry. Smaller companies should have
been given tax relief in this budget to counter the impact of a sharply
appreciated rupee. The increase in excise duty for packaged software will lead
to increased piracy.

S Mahalingam, CFO and ED, TCS, also feels that by being under the service tax
net will increase the cost of technology for users and push up the cost of
automation not just in the private sector but also in the public sector and
government departments. Another factor that could push up costs for deploying
technology is that customs duty for importing packaged software has been
increased from 8% to 12%. This would increase the input cost across industries,
not just the IT industry.

According to S Rajendran, CMO, Acer India, Though some relief has been
mentioned on duties for some hardware items, at this time we are not clear what
these are. We will have to wait till we are able to see the particular
notifications. We wish there was relief in the budget to reduce IT hardware cost
and make it more affordable.

A Knowledge Nation

The government has done a laudable task at strengthening the education
system. In this sector, the government has allocated Rs 13,100 crore to the
Sarva Shiksha Abhiyan (SSA). Till now, the focus of the SSA was to provide
quality basic education and opportunity for improving human capabilities to all
children, in a mission mode but now the focus will shift from access and
infrastructure at the primary level to enhancing retention, improving quality of
learning, and ensuring access to upper primary classes. The education sector
needs greater attention as the future of our youth, and in turn of our country,
depends up good quality of education. Announcements for IITs, IIScs and high
schools for secondary and higher education shows the governments commitment
toward quality education and growing the talent poola challenge facing the IT
industry as well.

S Rajendran of Acer India says, Full credit to the finance minister in
balancing various competing requirements and making some bold announcements that
benefit the important sectors of education, health and agriculture. We welcome
increased allocation to SSA and education, and expect this to have a positive
result for us. In the same context, we welcome one lakh rural information
centers, allocations for SWAN, and the state data centers. It is a pointer that
the finance minister appreciates the importance of deeper penetration of IT as a
leveraging force for economic development.

Mahalingam of TCS says, The good news for IT and the people-intensive
industries is the incentives to education with 20% more outlay. The Rs 85 crore
scholarship scheme for students pursuing science education is good news for IT,
and especially for TCS, which has been tapping into the science streams through
its own from science to software transformation program for students.

Manoj Chugh of EMC says, Overall, the budget looks to focus on enhancing
long term economic growth through stronger investments in social infrastructure.
In this direction, investment in education for not only spread but also
improvement of quality is encouraging. The setting up of additional IITs and a
fund for improving employability of our workforce are positive initiatives to
address the manpower needs of the technology sector.

According to Mittal It is knowledge that will drive success in the 21st
century. India has the opportunity to become a knowledge society. Following the
Prime Ministers announcement, an IIM at Shillong; three IISERs at Mohali, Pune
and Kolkata; and an IIIT at Kanchipuram have started functioning. The government
will establish one central university in each of the hitherto uncovered states.
We propose to make a beginning in 2008-09 by establishing sixteen central
universities. Besides, we propose to set up three IITs in Andhra Pradesh, Bihar
and Rajasthan; two IISERs at Bhopal and Tiruvananthapuram; and two Schools of
Planning and Architecture at Bhopal and Vijayawada. More institutes of higher
education, as promised by the Prime Minister, will be established during the
Eleventh Plan period.

Som Mittal also said that there is a compelling need to launch a world-class
skill development program, in mission mode, that will address the challenge of
imparting the skills required by a growing economy. Both the structure and the
leadership of the mission must be such that the program can be scaled up quickly
to cover the whole country. Hence, I propose to establish a non-profit
corporation and entrust the mission to that corporation. It is my intention to
garner about Rs 15,000 crore as capital from Governments, the public and private
sector, and bilateral and multilateral sources. I shall begin by putting Rs
1,000 crore as governments equity in the proposed non-profit corporation.

R Sivakumar, MD, Sales and Marketing, South Asia, Intel, says, We are
excited that the budget is focused on building the social infrastructure by
increasing broadband connectivity and strengthening the education system across
India. These measures are a step forward for transforming India into a knowledge
society.

The significantly higher allocation for education and health sector and
setting up of a new National Skill Development Mission offer a positive signal
to the knowledge-based industries to contribute to the economic development of
the country, says Kapil Dev Singh, country manager of IDC India.

The contribution of IT industry to the buoyant Indian economy did not
deserve excise enhancement on packaged software and imposition of service tax on
custom software, adds Singh.

The emphasis on building India into a knowledge society through a series of
proposalssetting up three new IITs, scholarships for innovation, R&D, and a
national knowledge network to connect universitiesare very welcome, says
Pradeep Gupta, chairman, CyberMedia and the past chairman of Pan-IIT Alumni
India.

Suffering from Imbalance

On one side, the government has allocated fund to give impetus to
e-governance initiatives in education, healthcare and agriculture. And, on the
other side, the government has put a lot of burden on the IT industry by not
extending the STPI scheme beyond the year 2009, which may result in a number of
taxes and duties imposed on the IT industry. Employee retention would be another
challenge.

The need of the hour is to rethink and reconsider the issues that could
hamper the future growth of the IT industry and could affect adversely the
Indian economy and the common man.

Sandeep Sharma

sandeeps@cybermedia.co.in