India's budget 'retains IT competitiveness'

Government unveils budget that is warmly welcomed by national trade body Nassom, but deemed inadequate by some industry watchers.
Written by Swati Prasad, Contributor

INDIA--National trade body Nasscom says the government has made good by fulfilling most of its pre-budget demands, but industry watchers and players are divided on whether the new budget is adequate.

India's finance minister Pranab Mukherjee, unveiled the country's budget in Parliament on Monday, which aims to revive economic growth back to 9 percent, from 6.7 percent between 2008 and 2009. To achieve this target, Mukherjee focused on lower taxes, higher personal income-tax exemption limits and the abolition of some taxes. These measures are expected to increase disposable incomes, thereby, spurring higher consumption.

Nasscom has welcomed the budget. Chairman Pramod Bhasin said in a statement: "Many of the initiatives in this year's budget recognize the role the IT-BPO (business process outsourcing) industry can play in promoting inclusive growth, and creating substantial employment opportunities in the country."

One key highlight, under section 10A and 10B of India's Income Tax Act, marks the extension of the tax holiday established for the IT sector, allowing industry players to pay little or no taxes. Slated to expire Mar. 31, 2010, the tax holiday has been extended for another year.

Nasscom President Som Mittal said in a statement: "This step will help the industry mitigate the impact of the current economic environment and help India retain its competitiveness."

"Little" to celebrate
The new budget, however, received mixed response from industry analysts, some of whom were less enthusiastic.

"Budget has little for the IT industry to celebrate," said Kapil Dev Singh, country manager for IDC India. Criticizing the stop-gap tax holiday extension, he noted: "Software exporters have to contend with 'a year at a time' extension of Software Technology Parks of India (STPI) scheme."

Others noted the huge expectations of the budget. "But, it turned out to be a sober, minimalist and practical budget with some tweaks and correction of anomalies," Partha Iyengar, regional research director at Gartner India, told ZDNet Asia in an e-mail.

Rakesh Dharawat, executive director of PricewaterhouseCoopers, said in an e-mail interview: "The industry was expecting a longer extension of the tax holiday under sections 10A and 10B, but the one-year extension is nonetheless a very welcome step."

Singh added that while the budget was not populist in nature, it does try to balance short-term challenges with long-term priorities.

In its pre-budget memorandum, Nasscom had requested that the government resolve duplicity of indirect taxes for packaged software, abolish the fringe benefit tax (FBT), provide clarity in policies for service-tax refunds, and develop a uniform approach on transfer pricing. All these were granted.

IDC's Singh said: "Abolition of FBT should come as a huge relief to the sector." He added this tax was a bugbear for the IT industry since several employees were remunerated through employee stock options (ESOPs).

The only increase in tax liability for the IT sector came in the form of the minimum alternate tax (MAT), which increased from 10 to 15 percent.

Despite this tax hike, Dharawat said: "The abolition of the FBT, removal of the anomaly in the computation of benefits under Section 10AA of the Income Tax Act, limited exemption from central value-added tax (CENVAT) to packaged software and the simplification of input tax refund process, make this the first budget in many years to effectively address the concerns of the IT-ITES (IT-enabled services) industry."

But, not everyone was content with the fiscal sops. Ajai Chowdhry, CEO and chairman of HCL Infosystems, said in an e-mail interview: "The ICT industry was looking for more support from the government. We had recommended a 100 percent-depreciation on financing of IT equipment, which was not included."

Impetus to e-government, education
The finance minister noted that the first set of unique identity numbers will be rolled out in 12 to 18 months. These numbers will be issued by the Unique Identification Authority of India (UIDAI), headed by Nandan Nilekani, co-founder of Infosys. The finance minister has proposed a provision of INR 1.2 billion (US$25 million) for this project.

Nasscom's Bhasin said: "The industry will be keen to partner the government in expanding e-government initiatives, including modernization of employment exchanges, the UIAD project and smart cards for healthcare services, to achieve enhanced governance."

The finance minister also increased the allocation for the "Mission in Education through ICT" scheme to INR 9 billion (US$188 million). He also took several steps for skills enhancement, increasing provisions for the setting up and upgrading of polytechnics under the Skill Development Mission to INR 4.95 billion (US$103 million). The government also allocated INR 21.13 billion (US$439.7 million) for Indian Institutes of Technology (IITs) and National Institutes of Technology, and proposed more funds for higher education.

"This is an encouraging measure," Chowdhry said.

Iyengar, however, had wanted the budget to include efforts to revamp primary education. "Some allocation and 'tinkering' with the IITs is not what India needs now, but unfortunately, that is all we have gotten in this budget," he said.

Swati Prasad is a freelance IT writer based in India.

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