Budget 2007
Not a hit with IT

The fourth Budget of the UPA was a bit of a dampener for the software sector, while leaving much of the hardware sector relatively untouched but uninspired. There's a lot more to be done on the IT front.

By Subimal Bhattacharjee

When Finance Minister P Chidambaram presented the fourth Budget of the United Progressive Alliance government, there were major expectations that he would positively address many of the pending issues of the IT industry. However, the overall Budget provisions relating to the sector turned out to be a bit of a dampener for the software sector, mostly because of the imposition of the Minimum Alternate Tax (MAT) and the imposition of Fringe Benefit Tax (FBT) on the Employment Stock Option Plan (ESOP). The hardware sector, on the other hand, is happy that no changes were proposed in the present duty structure for excise and customs for IT products.

So what is the expanse of the IT industry that the finance minister was addressing when he was preparing Budget 2007? In the financial year 2007, production in IT and the electronics industry is expected to increase to US$ 47.8 billion from US$ 37.4 billion in 2006, a growth of 27.8 per cent. Total software and services exports are expected to increase from US$ 23.6 billion in 2006 to US$ 31.3 billion in 2007. In the same period the IT hardware industry is expected to grow from US$ 7 billion to US$ 8.2 billion.

Some issues that needed the Budget's intervention were taxation and the continuation of the Software Technology Parks of India (STPI) benefits, more efforts at IT and e-governance penetration, boosting the domestic IT hardware and software market and, most importantly, supporting the industry's efforts to reach the IT software exports target of US$ 60 billion by 2010.

Thankfully, the finance minister addressed most of these issues in his Budget proposals. Some of the Budget's positive highlights are the enhancement of allocation for e-governance initiatives for Central projects to Rs 719 crore, and support for states to the tune of Rs 500 crore, the provision of Rs 33 crore for a scheme for the development of humanpower for the software export industry, the computerisation of the Public Distribution System and the Food Corporation of India, and the waiver of excise duty on all flash memory and DVD drives and DVD writers. However, the announcement to have retail sales price based assessments instead of the present factory gate price for personal computers, printers and all computer accessories, and also set-top boxes to access the Internet and television might actually push up the price of these products.

With the imposition of MAT of 11.22 per cent on the adjustable book profits of IT and ITES companies, Chidambaram has abolished the deductions under Section 10A/10B of the Income Tax Act. This will impact the smaller and medium companies more than the bigger ones. This still is less than corporate taxes that companies in other sectors pay, but, considering the fact that the IT industry was promised the advantage of the sunset clause till 2009, the finance minister should have waited till then to impose MAT. The IT industry has no doubt matured, but it still needs those incentives to collectively help realise the emerging competition and to achieve the 2010 target.

Also, MAT will apply to profitable companies located in export processing zones, software technology parks and export-oriented units, but nothing is mentioned about companies in the Special Economic Zones that have generally been the domain of the bigger IT companies. The tax structuring of the ITES industry by reorganising Section 72A of the Income Tax Act should have also been attempted by the finance minister to further boost the industry, which is facing competition from emerging destinations.

The extension of service tax provisions to lease rentals will also affect a major section of the IT and ITES industry as it depends on rental spaces for its operations. Similarly, the increase in education cess and the dividend distribution tax will have some impact on the profitability of these companies.

The IT hardware sector, flushed with the announcement of the semiconductor policy recently, has reason to feel happy with the increased focus on e-governance. Although computer penetration is still low in the country and the finance minister should have given more incentives for personal computer price reductions and not introduce the retail sale price-based excise duty, the hardware companies still stand to benefit from increased sales. The finance minister should also have given some special incentives to software products manufactured in the country, including waiving excise duty for the media they use to sell their products. The need to foster a domestic software base is essential in view of the myriad cyber security concerns.

Infrastructural support to sustain the IT industry and creating avenues for future growth have to be a priority area for the government. Quality and affordable bandwidth must be more readily available, and all such massive programmes by the industry need to have matching incentives. There is great need for deeper nationwide Internet penetration to enable e-governance and e-commerce efforts to make a real impact. The concomitant infrastructure, such as availability of electricity and proper roads, has must be improved. These are already becoming issues in many places. Similarly, the hotel industry needs to be spruced up. Some of the cities where IT has blossomed have serious issues of affordable and available hotel rooms for most part of a year.

While the Budget has been an exercise watched by many from the industry, the pace of development and change in the IT industry demands more action right through the year rather than an annual review. The finance minister could still pay heed to the reactions to the Budget 2007 proposals and make it more relevant to industry and the country's needs.

(The author writes on issues of IT policy)