IT Industry Not A Major Focus Of Union Budget 2010-11

‘Budget’ has been the buzzword in the country for the past couple of days. It’s like waiting for Santa Claus during Christmas. However, it is very obvious that no Santa is coming home for the IT industry this time. As aptly put by Partha Iyengar, Head of Research at Gartner India, “There were no ‘big bang’ measures specifically from an IT perspective”.

There were no sops offered to the industry by the budget this year. However, the Rs 1900 crore allocation to the Unique Identity project, and the setting up of an IT Innovation cell under the leadership of Nandan Nilekani, co-founder of Infosys, says that the government is set to leverage IT to the maximum for inclusive growth and effective delivery of services in the country.

Iyengar says, “The industry is beyond needing specific sops for it to remain competitive and continue its growth story. The bigger need for IT in India is in some of the broader macro areas that also impact the overall competitiveness of India in the global scheme of things. And this is likely to be the trend going forward, that there will not be a ‘separate list’ of things that the IT industry needs to continue to be successful. What is required for India and what is good for overall economic growth of India will be what is required for the IT industry.”

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Apart from the UID, the fact that the government has streamlined the FDI and has increased the R&D credits will give a boost to innovation in the industry. Says Surjeet Singh, Chief Financial Officer, Patni Computer Systems, “We welcome the higher percentage of weighted deduction on in-house R&D, which has been increased to 200 percent from 150 percent as it will incentivise IT companies’ innovation focus. We also appreciate the setting up of the ‘Technology Advisory Group for Unique Projects’ along with substantial outlay for UID project. This group will help in accelerated execution of large, strategic Government IT projects thereby benefiting IT companies”.

Agrees Manoj Kumar Mauni, Associate Vice President-IT, Kotak Life Insurance, and adds, “We are happy that the Government is committing to spend more on IT. It is only through IT that we can actually put the theory of inclusive growth into action.”

However, the one thing that the entire industry was waiting for is the extension of the tax holiday under the Software Technology Parks of India (STPI) scheme as per Section 10A of the Income Tax Act. The government has not announced parity of incentive towards STPI, and has also given the industry a sore tooth by increasing the Minimum Alternate Tax (MAT) from 15 percent to 18 percent.

“While overall the budget is positive, we are disappointed with the increase in MAT, which will be a burden on small and medium enterprises who are still struggling with the impact of the global recession,” says a NASSCOM statement.

Agrees Atul Hemani, MD, Omnitech InfoSolutions, “Overall the budget has been satisfactory but I feel that the STPI benefits should have been extended by one more year considering the economic scenario outside India. Also, a booster for research and development in the IT industry would have added to the flavour. Furthermore MAT should not have been increased as it will have a serious impact on the 100 percent export oriented units in India across industry verticals (major impact being on the IT industry)”.

Singh agrees and further adds that increase in MAT from 15 percent to 18 percent on book profits would result in higher out-go of cash in the short term and would affect Indian corporates adversely. “However this impact has been cushioned to a large extent by lowering of corporate surcharge from 10.0 percent to 7.5 percent. The budget also proposes to ease the process of refund of service tax credit for exporters of services, which will hopefully streamline the current cumbersome process”.

The fact that the excise duty exemptions on specific IT products have been withdrawn is another point of distress for the industry. Talking about his disillusionment with this, Ramesh Kamath, CFO, Aditya Birla Minacs, says, “This withdrawal of various excise benefits will definitely increase the cost of all my inputs. However, if you have to step back for a moment, the last one year was miserable for everybody. We had to fight against price reduction demanded by our customers. They have taken price reductions from us but our cost reductions were obviously limited. New deals are also coming up at competitive prices but on the other side, in the last three months, all the input costs have started hardening up”.

As far as the IT industry is concerned, this quote by Iyengar sums up its position in the budget clearly, “Budget watchers should now stop looking for specific ‘sops’ for the industry and focus more on the macro issues affecting the entire economy, as an indicator of the positive or negative impact on the IT industry”.