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India's budget a mixed bag for IT

Non-extension of tax holiday under STPI scheme disheartens ICT companies, but measures to leverage IT in government schemes and drive broadband in rural India get thumbs up.
Written by Swati Prasad, Contributor

The Indian ICT industry has expressed disappointment over the government's decision not to extend tax exemptions under the Software Technology Parks of India (STPI) scheme, but others approve its initiatives to drive technology developments in the villages.

Finance Minister Pranab Mukherjee on Monday presented the Union Budget 2011 in Parliament which did not have specific proposals for the IT sector. Instead, emphasis was placed largely on bridging India's digital divide through the use of IT and technology.

This raised mixed responses from the IT industry.

"Budget 2011 has been very lukewarm toward the IT sector with no major alterations directed toward it," Sunil Dutt, vice president and general manager of personal systems group, Hewlett-Packard India, said in a statement.

He noted that while initiatives, outlined in the budget, to increase the penetration of rural broadband connectivity announced are positive, their full benefits can be reaped only if personal computing devices are made affordable to the masses.

Manish Dugar, CFO of Wipro Technologies, concurred: "The minister has spoken of leveraging technology for e-government and tax administration, but the budget has no specific proposals for the IT sector."

IT companies had batted for reduced tax rates, specifically a minimum alternate tax (MAT) and an extension on the STPI tax holiday. Both did not materialize and this has disheartened many in the industry.

Susir Kumar, CEO of Intelenet Global Services, said: "I am disappointed that the tax holiday is not extended on STPI units". The STPI scheme, which expires in March 2011, provides tax exemptions to IT-ITES (IT and IT-enabled services) companies under Section 10A and 10B of the Income Tax Act.

Increase in tax burden
The IT-ITES industry had expected a reduction in MAT from 18 percent to 15 percent, but this was instead increased to 18.5 per cent of book profits.

Dugar said: "Increase in the rate of MAT, which was already very high, is going to add to our overall tax burden."

Patni Computer Systems CEO Jeya Kumar said: "We believe the inclusion of special economic zones under MAT will reduce the productivity of companies, especially in the small and medium sectors which form a major chunk of the IT industry."

The Indian government, though, has reduced tax on foreign dividends to 15 percent--a move that is likely to increase fund repatriation to parent companies in India. Ashank Desai, co-founder of IT services vendor Mastek, applauded this measure.

"We also welcome the reduction in corporate surcharge by 2.5 percent and believe it will have a positive impact on the profitability of most companies," Desai added.

The budget also outlined measures to strengthen India's social and financial inclusion agenda, which includes providing broadband connectivity and increasing the reach of banking facilities in villages.

"The growing role of technology outlined in improving governance will fasten the pace of opportunities for players like us," said Rajesh Janey, NetApp's president of India and SAARC.

The finance minister added that the Technology Advisory Group for Unique Projects (TAGUP) will look into technology aspects of five large government projects, including the Tax Information Network, National Pension Scheme and National Treasury Management Agency.

The Unique Identification of Authority of India (UIDAI), which is responsible for providing every Indian with a unique identification number, or Aadhaar, will begin enrolment of some 1 million individuals a day start April 2011.

"The dynamism we see due to scaled up flow of resources, including the intended generation of 1 million Aadhaar numbers, to rural India will prove to be significant," Janey said.

The government also unveiled plans to provide broadband connection, as a part of the national broadband strategy, to all 325,000 rural panchayats--or local governments of Indian villages--by 2015.

Desai said: "By enabling rural India to harness broadband Internet, the minister has also provided a fillip toward the cause of penetrating Internet to the grassroots of the country."

Naresh Wadhwa, president and country manager of Cisco Systems India and SAARC, said: "The budget this year provides a number of measures to promote inclusive growth which, in my opinion, is crucial to sustain India's development ambitions."

The budget also includes several initiatives to take banking to the masses, including setting up banks in villages with a population of more than 2,000 people, establishing a bill to allow the Reserve Bank of India to grant more banking licenses, as well as providing additional support to the National Bank for Agriculture and Rural Development.

According to Kamlesh Bhatia, research director at Gartner, the plan to build the National Knowledge Network by connecting 1,500 institutions of higher learning and research through fiber backbone, by March 2012, is a step in the right direction. "Countries like Singapore have benefitted immensely from similar initiatives," Bhatia said.

He added that the budget is largely aimed at continuing the growth momentum from 2010.

Swati Prasad is a freelance IT writer based in India.

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