What Budget 2011-12 Means For Indian IT

With the Indian economy bouncing back to its pre-crisis growth trajectory, all eyes have been on Union Budget 2011-12 to at least maintain the growth momentum if not give it a spurt.

In many ways, the budget proved to be a classic example of “Give and Take”, as the Finance Minister tried to work out that happy equilibrium. Towards equilibrium he did move, though doubtfully a happy one. With appreciation and disappointments coming in the same breath from the Indian IT industry, one might say that the Finance Minister didn’t do too bad. Focus on inclusive growth and initiatives to boost domestic IT consumption draw special mention. But, the fact that the industry’s major demand for tax benefits under STPI has been sorely ignored, tilts the balance in favour of a more unfavourable budget.

At the Heart of STPI Matter

Extension of tax benefits under STPI was the key among the various demands put forth by the Indian IT industry. But, the announcement turned out to be contradictory to their expectations since the budget this year made no mention of STPI and Sec 80IA and 80IB. The STPI tax benefits available to the IT companies is about to lapse in March 2011. The lack of extension of the sops is bound to hurt tier-II companies that are receiving the benefits now.

Ashank Desai, Co-Founder – Mastek, feels disappointed by the fact that the finance minister has not extended the 10 year exemption period by even one year. On the other hand, Hanuman Tripathi, Group Managing Director, Infrasoft Technologies Limited, states that no extension on STPI benefits is very demoralising. Keshav R. Murugesh, Group CEO, WNS Global Services, re-iterates the industry’s sentiments as he expresses his disappointment on the STPI omission. “This will be a dampener for the USD 60 billion Indian IT/BPO industry that contributes nearly 5% of the country’s GDP. We had hoped that the sunset of the STPI scheme would be extended to coincide with the introduction of the new DTC from April 1, 2012. Currently we need both direct and indirect support from the government to maintain ’the India advantage’ as a global BPO destination. It is important to note that in countries like China and Philippines, the IT/BPO industry is enjoying support from their governments on tax benefits and policies and they can pose a great challenge to the Indian IT/ITeS industry in the years to come,” he explains.

However, Jeya Kumar, Chief Executive Officer, Patni Computer Systems, is hopeful that even though the budget does not mention any extension of the STPI scheme, the proposed Direct Tax code expected to be enforced in April 2012 will provide succour to the industry for its growth.

Taxing Issues

Desai feels that tax issues of the IT sector have not been addressed in the budget. For instance, Minimum Alternative Tax (MAT), which was expected to be reduced, has been increased rather to 18.5% from 18%. While the increase of MAT from 18%-18.5% is notable, some experts are of the opinion that it will not have drastic implications among companies.

However, the more serious of the issues is the inclusion of SEZs under MAT. This will have a major impact on IT companies that have set up their SEZs and will now be affected with an increase in the tax rates from FY12. “SEZ units being levied with MAT 18.5% now, is going back on the commitment of keeping SEZ units tax free for some more years to come. The assumption being made that MAT will be refunded as a set-off against full tax paid at a later date implies that the government expects IT exports to be taxed at full rate in future,” Tripathi strongly retorts. Kumar, on the other hand, believes that the inclusion of SEZs under MAT will reduce the productivity of companies, especially in the small and medium sectors which form a major chunk of the IT industry.

Also, the much awaited clarification regarding taxation of licensed software did not come which is disappointing, as the ambiguity continues.

While the tax proposals mostly invited brickbats, some of the proposals that got applauded include reduction of tax on Foreign Dividends to 15%, which may increase the fund repatriation to the Parent companies in India. Although new services are included for Service Tax increasing the input costs, the efforts to streamline and simplify the refund mechanism is a welcome step, feels Kumar.

According to NASSCOM, the services sector was lauded for its double digit growth rates, but the fastest growing services industry, IT-BPO faced double negatives – imposition of MAT on SEZ and withdrawal of tax exemption under Section 10A/10B.

The Finance Minister’s consideration of reducing the corporate surcharge by 2.5% is also believed to have a positive impact on the profitability of most companies.

The budget has further announced exemption on CVD on import of software where value of MRP cannot be identified at the time of import. This is relevant where subsequent licensing of software gets income by way of licensing fees or royalty for number of years. Hence, in such cases MRP cannot be calculated. Commenting on this development, Santosh Dalvi, Executive Director, KPMG states, “Although service tax is payable on this fees or royalty, this Amendment would certainly simplify the import process and benefit the sector.”

Further, service exporters and SEZs will now get the refund of service tax on input services in line with the current drawback procedure applicable to export of goods. According to Dalvi, this will be a major relief to the sector as they have to presently go through a cumbersome and time consuming process and litigation to realise the refund.

Domestic Fillip

The domestic market for IT has a lot to cheer about from the budget, with a slew of initiatives providing the much needed boost to the demand for IT consumption. According to Kamlesh Bhatia, Research Director at Gartner, the emphasis has largely been on bridging the digital divide through use of IT and technology, which will translate into boost for domestic IT consumption.

Driving the domestic charge is the impetus laid by the government on IT in governance and development of IT infrastructure. The growing role of technology outlined in improving governance will fasten the pace of growth of the domestic IT adoption. At the heart of this is the development of IT infrastructure. The budget lays great stress on strengthening the IT infrastructure and announces plans to set up national information utility backbone of IT and NSDL by June- July 2011.

The FM has announced that five large projects of the government, namely Unique Identification Authority of India (UIDAI), Tax Information Network (TIN), National Pension Scheme (NPS) Goods & Services Tax (GST) and National Treasury Management Agency (NTMA) will be put under an IT enablement process. Besides, there are many other initiatives announced for creating a National Knowledge Network, providing bandwidths to Gram Panchayats, etc. Thereby, creating demand for domestic IT.

Notable announcements under these projects include, grant of Rs. 300 crore to states for computerisation of stamp duty, modernisation of stamp and registration administration and roll out e-stamping in all the districts in the next three years; under Mission mode projects, funds released to 31 projects received from States/UTs for computerisation of Commercial taxes; various IT initiatives undertaken for efficient tax administration, including e-filing and e-payment of taxes, adoption of ‘Sevottam’ concept by CBEC and CBDT, web based facility for tax payers to track the resolution of refunds and credit for pre-paid taxes and augmentation of processing capacity.

But, what takes away the cake is the Finance Minister’s emphasis on strengthening of IT infrastructure for GST rollout and connectivity to 1,500 institutions of higher learning and research through optical fiber backbone by March 2012. The Finance Minister has announced significant progress in establishing GST Network (GSTN), which will serve as IT infrastructure for introduction of GST. These will lead to a significant rise in domestic IT infrastructure demand. According to Paresh Pujara, Group CIO, Adani, “If you see the entire budget is about infrastructure and supporting infrastructure technology is the only requirement.”

According to Tripathi, for the domestic IT industry the indicators are very positive with some clear picture likely to emerge on IT budgets & planning that e governance projects will have.

Emphasis on UID

The budget laid special emphasis on improving governance through Unique Identification (UID). The Finance Minister said that the UID project expected to churn out 10 lakh numbers per day from 1st Oct 2011. The Finance Minister has further proposed to raise budgetary allocation for the project by over 50 per cent. The government has allocated Rs 1,470 crore for next fiscal for Aadhaar project as compared to Rs 960.66 crore given to it under plan head in 2010-11. This will provide yet another fillip to the domestic demand.

“The UID initiative by the Government will be a boon for the IT industry, and will support development of the country. A lot of information can be leveraged across various IT systems, thus improving the quality of e-governance,” shares Avinash Velhal, Cluster CIO Siemens.

According to Ashwini K Aggarwal, Executive Director, MAIT, “The UIDAI implementation; National Knowledge Network and projects like Central Electronic Registry will improve the system efficiency as well as boost demand for IT in the country.”

According to Rajesh Janey, President- India and SAARC, NetApp, “The dynamism we see due to scaled up flow of resources (including the intended generation of 10 lakhs Aadhaar numbers from October 2011) to rural India will prove to be significant.”

In line are NASSCOM’s views: “Technology implementation was a key theme that found relevance in the budget proposals – UID, GST Network, National Knowledge Network, Centralised Processing Units, rural broadband etc would provide additional opportunities for the industry to partner with the Government.”

The Finance Minister has further announced setting up of a technology advisory group for unique projects, which is expected to speed up the execution of Government IT projects. The advisory group will be headed by Nandan Nilekani, head of the Unique Identification Authority of India (UIDAI).

With inputs from Sana Zabeen.