Union Budget 2012-13: Neither Strong Positive Nor Negative

IT Industry reacts to Union Budget 2012-13 saying there’s nothing much in it for them:

Overall this budget was quite lukewarm; no major policy announcements save an intention to cap subsidies at 2% of GDP. As far as its impact on the IT/ITeS sectors is concerned, there were no positives, contrary to our expectations. There was no change in MAT for SEZs, rather the service tax has been increased from 10% to 12% (effectively 12.36% after surcharge & cess), which will mean incremental cost (for items where refund is not allowed) or incremental working capital as refunds are painfully slow and the Finance Minister didn’t mention any plans to streamline the refunds process.

Also, we noticed that the list of 17 exempted items does not include leased lines which will have a large impact on the cash flow. We look forward to get more details on the newly introduced, GAAR – with an appropriate mechanism to control; earlier disappointments over similar mechanisms e.g. the DRP system does not make us very enthusiastic about the same. Our expectations from the Advance Pricing Arrangements (APAs) are positive, as it would prevent future disputes on transfer pricing which has been a problem area for the industry, though we await details on the APAs also. The hike in the diesel price would increasingly impact our transport and power costs.

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Spokesperson, WNS

In the backdrop of challenges pervading the economy, we see that the Union Budget 2012 has announced economic and tax reforms to set the stage for sustained growth and development. As part of the 12th Five Year Plan, we welcome the government’s move to outline policies that will generate domestic demand recovery.

As a foreign corporation with an Indian subsidiary, the government’s plan to introduce tax reforms for the enactment of Direct Tax Code Bill is encouraging for us. The move to set up the GST network as a National Information Utility and operationalize it by August 2012 is also favourable for the industry. The budget has also recognised the role of technology in creating a citizen centric governance framework, reflected in the subsidy provided for Aadhaar tablet enabled payments for various government schemes in atleast 50 districts within next 6 months.

That said, there have been no mentions of clearing the ambiguity around treating software as goods (subject to VAT) or as service (and subject to service tax). We were also hopeful of revisions around the Minimum Alternate Tax (MAT) on SEZ as last year it saw the investments in SEZs going down. Amendments towards this end would have helped the industry create a conducive environment to attract both local as well as foreign investments into the country.

Sanjay Deshmukh, Area Vice President – India Subcontinent, Citrix Systems India Pvt Ltd.

The Union Budget 2012 is a balanced one and has put forth many provisions to improve macroeconomic environment and strengthen domestic growth drivers. Although the budget doesn’t majorly focus on telecom and allied industries, there are a few provisions which are very crucial from a populist perspective:

The exemption of duty on mobile phone parts is surely an ecosystem enabler as it will lower the market prices of phones which are being assembled in India. This will help us achieve not only last mile connectivity but will fuel growth of ancillary sectors such as mobile content development, mobile banking, mobile advertising etc.

Over all, the government realises the role that mobile devices have to play in enhancing and streamlining IT oriented citizen centric governance framework. This is reflected by two provisions in the government 1) creation of a mobile-based fertilizer management system that will provide end to-end information on movement of fertilisers and subsidies. 2) roll out Aadhaar tablet enabled payments for various government schemes in at least 50 districts within next 6 months.

However, the increase in the service tax from 10% to 12% will adversely affect the masses as mobile phone bills will become higher. Barring this negative point, the rest of the provisions in the budget are encouraging for the sector per se.

Dippak Khurana, CEO & Co-Founder, Vserv.mobi.

With Excise duty increase the required Stimulus for growth has been curtailed and would be inflationary. This puts pressure on the already slow manufacturing sector. Initiatives to bring down Subsidies from current 2.5% of GDP to 2% in 2012-13 and 1.75% in 2013-14 is welcoming. GST & DTC reforms still not aggressively pursued as expected by the Industry and People. Another welcome aspect is the 12th Plan period promises 50 Lakh Crore Investment in Infrastructure with 50% private participation-implementation would still remain a major challenge. Overall not a very clear and definitive growth budget.

Sandeep Nair, President and MD, Emerson Network Power

The budget overall is a fairly ‘political budget’, with very little in the way of bold (or even timid) reforms to drive economic growth. Given the current economic climate it seems to be focused on not upsetting anyone (read political ‘allies’) too much, by not trying to please anyone too much. The only slight silver lining is the verbal emphasis and some increase in outlays to the infrastructure sector, but, given the massive requirements here, even this is likely to be seen as too little too late. From an IT sector perspective, there is nothing specific that is either a strong negative or positive. Some of the key areas of concern for the industry, like skills development have not received any major focus.

Overall would rate the budget as a 3/10.

Partha Iyengar, Vice President, Distinguished Analyst, Regional Research Director, India

Nothing much in the budget for IT and not enough focus on incentives for skill building or Tier 3 cities: The announced advance pricing agreement may help transfer pricing decisions and the USD 1 bn vc fund focused on MSME is good for entrepreneurship.

Dr Ganesh Natarajan, President & CEO, Zensar Technologies

The increase in the service tax rate is definitely a mood dampener for the IT industry but it may not have a significant business impact as users of IT services are essentially companies in which such services are being increasingly used in mission critical applications.

Richard D’souza, CEO, Melstar Information Technologies

This year’s budget has been a quite a non- event and not aimed at boosting fiscal consolidation, food security or DTC. It will be difficult for finance minister to keep the fiscal deficit at 5.1%. The highest saving possible will get around Rs. 22000 more in your hands but this will be nulled out with the increase in service tax and inflation.

Akshay Mehrotra, Chief Marketing Officer, PolicyBazaar

The government’s focus this year on enabling “faster, sustainable and more inclusive growth,” through the twelfth five year plan is welcome.

Scaling up of the Aadhar project as well as enabling it to support PDS will greatly benefit the common man. Leveraging technology to transfer subsidies directly to beneficiaries is definitely a positive step.

The budget lays considerable focus on infrastructure and rural development. The increased infrastructure spending at Rs 50 lakh crore, Rs 10,000 crore allocated to NABARD for refinancing regional rural banks and the plan to set up ultra small branches under the ‘Swabhiman’ campaign is encouraging.

Quality healthcare is a crying need so it’s good to see the NHRM provision being increased from 18,115 crore to 20,822 crore. Measures to boost both basic education as well as skill development initiatives through an allocation of Rs 1000 crore for National Skill Development Corporation is laudable too.

On the industry front, setting up Rs 5,000 crore venture fund for MSME sector is a welcome move, given that SMEs employ a sizeable population. We are also hoping that the GST roll out is on track for August this year.

Overall, it is heartening to see that the budget addresses some key areas like education, healthcare and infrastructure which are critical to national growth & development.

Naresh Wadhwa, President and Country Manager, Cisco India & SAARC

It is encouraging to see that the budget is focused heavily on the rural development. Clearly, financial inclusion is high priority for the government. Financial Minister’s proposal to complete Aadhar in 50 districts over the next 6 months will lead to availability of financial services to more people.

Penetration of banks and financial services in rural India, presents larger scope for mobile banking and payment service providers. The budget will only encourage the adoption of mobile banking technologies.

The only road block that I see is the 2% increase in service tax. It will lead to higher tax attached to mobile phone bills and mobile transactions thereby affecting the usage of mobile services.

Overall the budget is growth-oriented with a huge impetus on rural areas and people residing therein.

Deepak Chandnani, CEO - Obopay

One of the key demands of the IT / ITES sector was certainty on transfer pricing arrangements, given the substantial amount of disputes that have arisen over the last few years. Provisions relating to Advance Pricing Agreements which have now been introduced, in advance of the DTC, will assist in reducing these disputes. Hopefully, rules relating to safe harbour regulations would also not be delayed further, so as to further reduce the scope of disputes.

In his speech, the Finance Minister, has also promised faster refunds of service tax and an enhanced scope for input credits for service tax. This will be of huge benefit for the IT / ITES sector since substantial amount of cash flow is locked up in refund claims. We will obviously need to see the fine print of the provisions as well as the actual implementation of the rules at the ground level, to confirm that the promises are getting delivered.

One area where nothing has been done is extending the life of MAT credits, which has started impacting the balance sheets of companies in the IT / ITES sector.

Ravi Mahajan, Partner, Tax & Regulatory Services, Ernst & Young India

The Finance Minister has been consistent with his social inclusion agenda and there has been an impressive rise in allocations for several key schemes including rural sanitation and water (27% increase) and right to education (21% increase). Corporate tax not being tinkered with is the only source of joy for private industry in general. Skill development being the other area where the minister has put a lot of stress on with a commendable credit guarantee scheme rolling out in addition to an enhanced allocation(Rs 750 cr) for the National Skill Development Council. We in the IT industry welcome this initiative. On the governance front a proposed new bill addressing procurement concerns will also help players like us in the IT industry if passed. Concerns around price rise aggravate however with an increase in excise duty and service tax proposed and with no significant tax exemptions announced, the burden felt by the tax-paying citizen will go up further. Overall a conservative and cautious budget focusing on fiscal consolidation.

Anil Valluri,President – NetApp India Marketing & Services Private Limited

The Hon’ble Finance Minister has demonstrated the “in-principle” acceptance for moving towards Unified GST by standardising the tax Rates across the spectrum of Services. The rationalisation of tax slabs for non corporate income taxes is also a step towards the implementation of Direct Taxes Code. However the excise duty increases and Service tax rate increase would mean higher costs for the Industry. The pill could have been sweetened by a reduction in corporate tax rates which did not happen.

_Ashutosh Prabhudesai, Controller & Director Finance, Fujitsu Consulting India
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Given the economic and political circumstances, the Finance Minister has presented a pragmatic Budget with doses of good intentions for long-term growth but lacked short term punch to get growth going.

For the IT industry, the request to exempt SEZ (special economic zone) income from MAT (Minimum Alternate Tax) has not been granted and this is disappointing.

The focus on R&D is good as the weighted deduction of 200% for R&D expenditure in an in-house facility has been extended beyond March 31, 2012 for a further period of five years.

There is no date or schedule for DTC (Direct Tax Code) implementation and GST, but the Government is committed to bring these in near future. For the IT industry the APA will be useful to ease transfer pricing litigation.

_N Chandrasekaran, CEO & MD Tata Consultancy Services
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With the proposal to extend the weighted deduction of 200 per cent for R&D expenditure in an in-house facility for five more years, the Union Budget FY 2012-13 is a positive promotion of the long-term importance of science, technology, research and innovation in India. This will be of benefit to organisations conducting research and development in India and will help to encourage them to deepen their connections with the ecosystem and the talent available in the country. The Finance Minister’s recognition that “the driving force of a modern nation is research and the creation of new knowledge” is to be applauded.

Sridhar Sarathy, Vice President – India operations, Juniper Networks

It is a good move that GST Network is being set up and operationalised by August 2012. We hope this is a harbinger of good news inform of a speedy GST implementation. This will have long term implications for India Inc.

Higher allocation on UID is also a welcome development. The leaky bucket of Indian economy must get fixed and the only way is UID.

_Dr. Alok Bharadwaj, President, MAIT
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It can be said that the Budget was well balanced and focuses more on long-term growth aspects instead of short-term populous measures, can be termed as positive and growth oriented. It indicates some prudent steps towards fiscal consolidation and reflects that the government is sincere about the fiscal situation going forward. The proposed full exemption on mobile phone parts may further make the smartphone affordable to larger section of the masses and basis the direct taxes, the increase in disposal income will further enhance the penetration of smartphones. The budget is expected to stimulate growth for agriculture, banking & m-payments industry with development of tier II, III markets. This will in turn enhance the adoption of mobility contributing to the overall growth of the economy. Introduction of a constitutional amendment for GST is also a positive development.

Sunil Dutt, Managing Director, Research In Motion India

At present, companies engaged in certain businesses are eligible for a tax deduction of 200% on certain expenditure incurred by them on in-house research and development facility. This deduction was slated to expire on 31 March 2012.

It is proposed in the Union Budget 2012 to extend this deduction by another period of five years. The industry had demanded this benefit given that innovation has become an imperative in today’s economy without which the industry will not remain competitive. This is a welcome move especially given that implementation of Direct Taxes Code is now delayed.

The above proposals dovetail with government objective of ensuring that R&D is given enough emphasis given India’s innovation standing vis-a-vis the rest of the world.

Vikram Doshi, Tax Partner, KPMG

National Association of Software and Services Companies (NASSCOM) has expressed its disappointment on the Union Budget Proposals 2012-13, terming the budget proposal as a ‘lost opportunity’ for the economy. Budget 2012 is disappointing on various counts – there is no focus on putting the economy on a high growth trajectory; fiscal deficit reduction is through higher taxation, rather than expenditure management; there is no roadmap on implementation of DTC and GST; and also issues of tax simplification, litigation have not been addressed. The continuing uncertain business environment will be negative for investment and hence for growth as well. Equally important, given the current account deficit, there is need to provide a strategic thrust on high value exports; this aspect has been totally ignored.

While the focus on infrastructure through various schemes is positive, the increase in indirect taxes both service tax and excise is a setback.

For the USD 100 billion IT-BPO Sector, budget expectations largely focused on a simplified, consistent and credible policy environment that is implemented in letter and spirit. However, the fine print, some of which is still to be analysed, has many provisions which appear retrograde, increasing discretionary powers and interpretation issues.

Specific impact on the sector includes:

• The SEZ policy was introduced in 2005. MAT was introduced in 2011 adversely impacting the viability of investments already made. This has not been removed.

• Transfer pricing litigation and lack of clarity has been a major burden for the sector. The Finance Minister has announced introduction of Advance Pricing Agreement (APA) from 2012. However, APA is a long drawn out process and it is not clear how the current issues will be resolved. Moreover, transfer pricing regulations have now been introduced for domestic transactions, further increasing the complexity.

• The government has announced a USD 1 billion venture capital fund for MSME across the country. While this is welcome, it is far too little. NASSCOM had also recommended the need for reduction of TDS for SMEs and introduction of non-profit linked incentives, both of which have found no mention.

• Increase in Service tax and Excise duty will increase cost of doing business in the country. There have been some announcements on simplification of service tax refunds, removal of dual levy of service tax and VAT – the processes still need to be elaborated.

• Several provisions related to withholding tax, international cross border transactions and GAAR have been introduced in the Finance Bill. These will add further complexity and it is particularly unfortunate that some of them will apply retrospectively.

• Overall, there are many increased provisions and obligations on the corporate tax payers. These are subject to multiple interpretations and will lead to substantial increase in discretionary power with tax administration.

• We welcome the announcements on IT being leveraged to create an effective implementation platform for government delivery of programs and direct transfer of subsidies leveraging Aadhar. The industry would continue to partner with the government for implementation of these programs.

National Association of Software and Services Companies (NASSCOM)

Looking at the current global uncertain economic environment, the budget looks like a very pragmatic and realistic one. The approach to the budget is very clear – focus on more inclusive growth, invest more in infrastructure, create mechanism to give financial support to some of the ailing sectors of the economy, expand the tax base, bring efficiency in subsidy spending and focus on transparency by taking some steps to arrest the black money.

V Balakrishnan, CFO, Infosys Limited

The increased outlays on education with an emphasis of skilling the youth are necessary steps to leverage the demographic divided in the future and tap emerging opportunities in the areas of Information Technology such as cloud computing and Big Data

Rajesh Janey, EMC India & SAARC president

This year, the Finance Minister has proposed a fair bill which is for the most part populist in nature. It bodes well for new investors and also creates a wonderful picture in the health, education, NREGA etc. sectors. For the IT industry however, this is a moderately encouraging bill and has made few strides in the development of the sector.

Jagdish Mahapatra, Managing Director- India and SAARC, McAfee