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The Union Budget 2005 was no doubt a fiscal tightrope walk for P Chidambaram-with varying constituents of the UPA and the Left pulling in different directions. Notwithstanding the ambitious wish lists, India Inc was, sort of, prepared that these centripetal pulls would ensure a populist Budget that might not meet the most hopeful expectations. The experience of the IT sector has not been very different-it is marked with a feeling of déjà vu; most observers agree that not much has changed on the ground. Most IT industry bigwigs felt the budget, notwithstanding its few good points, was relatively insipid and below expectations-especially coming as it does from the duo of Manmohan Singh and Chidambaram-considered by many as the architects of the economic liberalization that spurred the growth of the IT industry in the first place.

P Chidambaram

While large sections of the IT sector are disappointed at this status quo, certain provisions have left a few of them really flummoxed. For one, the software services sector is perplexed that the Budget has slapped a 30% tax on fringe benefits, to be incurred by companies on behalf of their employees. Infosys feels that this fringe benefits tax can be a cause of worry, primarily because of definitional issues. While if in spirit the intent is merely to tax some fringe benefits not currently under the tax ambit, it seems reasonable enough; but the contention is that in letter the definition of fringe benefits looks very wide now.

Concurs Mohan Das Pai, CFO, Infosys: "While the proposal has exempted expenses incurred on conveyance and canteen facilities, it is still not clear what could be construed as fringe benefits extended to employees, collectively. We definitely need government clarification on this issue." Most software services and BPO companies admit that the fringe benefits taxation proposal can turn out to be their Achilles' heel, with most of them spending liberally on employee welfare. And to encounter the grave attrition factor, it might not be possible for most of these companies to roll back on these fringe benefits.

The definition of fringe benefits needs to be modified, so as to explicitly exclude all items of genuine business expenditure Kiran Karnik, president, Nasscom

S Ramadorai, CEO, TCS feels that while pushing ahead with the Government's all-inclusive vision of development, the FM has adroitly juggled with the concerns of the IT industry and expertly integrated them into the overall master plan: "What is particularly laudable is the attempt to focus on creating world-class infrastructure that is critical for the sustained growth of knowledge-based industries like IT. The Budget has "addressed this through creating SPVs for funding critical urban infrastructure projects.

On the education front too the Budget recommendations have earned kudos from the IT industry. Nasscom endorses the emphasis laid by the government on investment for the social sector, especially for education, health and infrastructure. This will be further facilitated by the commitment to ensure telephone connectivity to every village, as indicated by the Finance Minister.

While Chidambaram has announced the largest ever outlay for education in the country, he has also placed the responsibility of creating 70 lakh jobs on the IT industry. The vision to make the Indian Institute of Science a best-of-class university in the world is recognition of the potential of India's homegrown institutions. Now, other institutes need to benchmark themselves against this global standard too. Arun Kumar, president & MD, Flextronics Software Systems (erstwhile Hughes Software Systems) feels that recognizing IT's contribution as a job creator is a positive endorsement of the achievements of this sector.

The Budget has a few other hits and misses. It paid heed to Nasscom's recommendation of reducing the rate of taxation of 'fees for technical services' (FTS) and 'royalty' to a maximum of 10%. Hopefully, with this measure, the process has been initiated to push this archaic provision, a legacy of the era when India was a net importer of technology, to the dustbins of history. This, feels Pai, now needs to be incorporated in the Double Taxation Avoidance Agreements with other countries.

Reduction in corporate taxes and personal taxes, though long overdue, would bring some succor to the IT industry, too, like other sectors. While the status quo nature of the Budget is otherwise a cause of disappointment, at least no change in Sections 10A/10B of the IT Act gave some relief to the IT industry-this allows continuation of the benefit of tax exemption on software exports. Under the sections of this Act, export turnover excludes forex expenses incurred on technical services provided outside India. But the IT department clubs all forex expenses, including allowances given to employees at client sites-denying IT firms exemption on profits from exports. Therefore, there remains a possibility of this Act in conjunction with fringe benefits later coming back to haunt the bottomlines of software services and BPO companies.

On the hardware front: the Budget measures include zero customs duty on items bound under the Information Technology Agreement. In addition, the customs duty on specified capital goods and all inputs required for the manufacture of ITA bound items has been removed. This Raj Saraf, MD, Zenith Computers, argues, would provide a level playing field to the domestic industry. Interestingly, additional countervailing duty (CVD) at 4% has been imposed with immediate effect from 1st March 2005, only on items bound under the Information Technology Agreement, and on specified inputs/raw materials for manufacture of electronics/IT goods. Credit for the CVD will be available against payment of excise duty.

The govt's decision to increase tele-density across all villages by 2007 will positively impact connectivity, helping rural Indians be a part of the digital revolution Rangnath Salgame, president, Cisco

In the first glance, this would result in a fall in the cost of manufacturing items bound under the ITA. In the ideal scenario, with the increase in competition and the abolition of customs duties, the lower costs should be passed on to the end-user, resulting in availability of cheaper hardware, thus giving much-needed encouragement to the hardware industry, which has been a poor cousin of the high-profile software industry in the past. However Santanu Ghosh, MD, Xenitis Infotech feels that ultimately this might not happen in all cases-since larger components like motherboards or monitors would see some duty exemption but not CPUs or hard disks, low-end Celeron kind of PC prices are bound to go up by 8-10%.

Vinnie Mehta, Executive Director, MAIT is glad that anomalies of inverted customs tariff structure arising out of the implementation of the IT agreement have been addressed.

Being an alumnus from IISc, the vision to make the institute a best-of-class university in the world is not only recognition of the potential of India's homegrown institutions but also a matter of personal joy for me S Ramadorai, CEO, TCS

Currently, with no excise duty on the finished PC, this would lead to still additional CENVAT overflow and a local manufacturer will have to absorb the additional CVD on inputs. Hence, the prices of desktop computers manufactured in India will increase slightly; however fully imported peripherals, notebooks, servers etc. will be cheaper by 5%. One school of opinion is that this anyway would be the scenario in the zero duty regime post-WTO implementation. Therefore, the Budget proposals are aimed at testing waters and after April 1 there might be modifications at a later date. In addition, the local manufacturing industry might gain from the implementation of VAT, and the "Manufacturing Competitiveness Program" to be launched to help small and medium enterprises remain competitive. 

Therefore, in the ultimate analysis it becomes quite clear that though the IT industry is not outright rejecting the Budget, the feeling is one of cautious optimism. The overbearing verdict seems to be that for IT the Budget is really insipid; barring few minor corrections-neither does it set any new revolutionary trend nor does it galvanize it into significant actions. An interesting footnote: the industry finds excitement in some innovative proposals. One is to make Mumbai a regional financial hub, which throws up emerging issues in terms of upgrading technology and communication and also for adopting global best business practices and tax policies. The other is to pump more funds into the Bangalore metro project-a long-standing demand from the constituents of India's Silicon Valley.

Rajneesh De

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