India Budget a boost for tech SMBs

While the Indian IT sector generally welcomes the growth-oriented measures such as schemes to drive funding and innovation, some segments will be hit by tax hikes.
Written by Swati Prasad, Contributor

With general assembly elections due next year, India's Budget 2013-2014 was expected to be populist one but has instead been lauded as prudent with trade body, Nasscom, calling it "responsible and reasonable".

Partha Iyengar, country manager for research at Gartner India, noted the Budget focused on growth sectors such as IT, infrastructure, education, skills development and incentives for the growth of domestic manufacturing.

Some key measures were taken that will impact the IT-ITES sector. For instance, the Budget clarified taxation rules announced in 2010 regarding development centers and safe harbor rules for transfer pricing. India’s finance minister P. Chidambaram said the rules will be based on the report of an expert panel dubbed the "Rangachary Committee", due to submit its report March 31 2013.

India's Budget outlines schemes to help SMBs, but MNCs face tax hikes.

The Budget also proposed measures to kickstart the entrepreneurial ecosystem in India through two initiatives. One, by recognizing investments in technology incubators established in academic institutions as corporate social responsibility (CSR). And two, through the decision to recognize angel investor pools under Securities and Exchange Board of India guidelines.

“This will encourage high net worth individuals to come forth and invest as angel investors, thus helping the entrepreneurial ecosystem,” PVG Menon, president, India Electronics and Semiconductor Association (IESA) said in a statement.  

Boost to SMEs, startups

One of the most important measures for the IT-ITES industry is the support extended to micro, small and midsize businesses (MSME) as well as start-ups.

There are a lot of positive initiatives for the MSME sector with announcements on listing on a MSME exchange (without IPO), non-tax benefits and tax exemptions for MSMEs that move to the large enterprise class. "These are significant incentives for MSMEs to invest in growth and become globally competitive,” Praveen Bhadada, director for market expansion at Zinnov said.

The Budget has doubled the Small Industries Development Bank of India’s (SIDBI’s) refinancing facility for MSMEs to INR 100 billion (US$1.83 billion). A INR 2 billion (US$36.61 million) fund has also been set up to promote innovation.

More could be done for electronics

Though the Budget is broadly growth-oriented, it has not addressed some of the specific concerns faced by the IT and electronics segment. Most of the industry’s demands have gone unmet, such as the recommendation for an inverted duty structure for manufacturers of IT products including PCs and the discontinuation of the minimum alternate tax (MAT) on special economic zones (SEZ).

What’s worse, the profitability of Indian units of multinational companies will be squeezed as the government proposed to hike the rate of tax on royalties and fees to 25 per cent--from the existing 10 percent--for getting technical support from their parent companies. According to the finance minister, the rationale behind raising the tax rate is to plug the gap of "tax avoidance arrangements". This proposal will hit MNCs across all sectors.

"[The] increase in royalty tax could be a visible concern for MNCs wanting to setup their subsidiary and do business in India," said Navaneet Mishra, vice president for globalization services at SAP India

Mobiles, set-top boxes to cost more

The Budget has increased the excise duty on mobile phones priced above INR 2,000 (US$36.80) from 1 percent to 6 percent. The government has also increased the import duty on set-top boxes (STBs) from 5 percent to 10 percent. These measures have irked the industry.

"The direct-to-home (DTH) industry is already paying 32 percent of its revenue as taxes," said Harit Nagpal, president of DTH Operators Association of India.

According to Nagpal, who is also managing director and CEO of Tata Sky, the government’s digitization mandate is entering its second phase and the industry’s requirement for STBs is many times the normal demand. Besides, there is no local manufacturer of repute who can deliver quality boxes in such quantities. "Therefore, this step seems out of place and in all fairness should be reversed," he said.

However, IESA has welcomed the increase in import duty of STBs. In a statement, IESA said STBs are one the fastest moving electronics products with a potential for 100 million STBs over the next two to three years as a result of the digitization of cable regulation.  

"We believe this increase of import duty will help Indian manufacturers address the unfair advantage imported STBs are getting and will boost domestic manufacturing of set-top boxes in India," Satya Gupta, chairman of IESA said.

Swati Prasad is a freelance IT writer based in India.

Editorial standards