IT Gets a new lifeline

Shelley Singh & Jessica Mehroin Irani
The Economic Times
The budget has extended a lifeline to the beleaguered information technology services sector, reeling under the twin pressures of slowing demand for technology services and slipping margins. For a sector, which has seen its growth targets revised down thrice by industry body Nasscom in the past 12 months, Pranab Mukherjee’s budget pronouncements offer something to cheer about.

The multiple taxation on packaged software has gone, tax benefits for services companies have been extended for another year, the industry scourge of fringe benefit tax has been scrapped and there’s more clarity on transfer pricing norms.

Smart cards for poor families, accelerating the unique identity project and modernising employment exchanges hold the promise of greater domestic spending.

“The IT industry has been hit hard by the global slowdown and with this budget, the government is putting its weight behind us,” said Nasscom chairman Pramod Bhasin, who also heads top BPO company Genpact.

Industry officials say Mukherjee had grasped some of the pain areas for the industry and addressed them with suitable alternatives, most aptly demonstrated by his scrapping of FBT, introducing rules for transfer pricing issues and removing multiple taxation on packaged software.

The Central Board of Direct Tax (CBDT) has been told to come up with an industry specific ‘safe-harbour’ mechanism to decide how captive software and back-office units of multinational companies, which account for 40% of industry revenue, are taxed in India.

“This is a good move for the industry as BPOs now have their own cost-plus mechanism, which removes the uncertainty factor,” said Ernst & Young partner Sudhir Kapadia.

Removal of excise duty and the countervailing duty on packaged software also comes as a relief for the industry that has been facing multiple taxes. The ensuing confusion caused sales to fall 25-30% and resulted in piracy rising in the last 12 months.

Despite all the cheers, some complaints remained. There was disaffection that some tax sops for Software Technology Parks of India (STPI) registered IT-BPO companies under section 10A and 10B of the IT Act were only extended by one year. “I’m disappointed that it has not been extended by three years,” said Alok Misra, CFO at WNS, a leading BPO company.

However, Nasscom said this was the first budget of the new government, and there would be ample time to look deeper at any specific issue later. An anomaly in Section 10AA of the IT Act that affected the tax benefits of companies in Special Economic Zones (SEZs) has also been corrected.

Industry officials are excited about the prospect of greater government spending, with the proposal to aggressively spend on infrastructure, NREGA and road projects likely to be a boost for IT vendors. “The government sector is an important revenue source for the industry when the west is drying up,” said Gartner principal analyst Diptarup Chakraborti.

The government’s plan to have a biometric smart card system for all below poverty line (BPL) families across the country, up from just a few districts last year, could help generate demand for the software and hardware industry. Ditto with the ambitious national identity card project to be headed by Infosys co-founder Nandan Nilekani.

The government has budgeted Rs 120 crore this year on the identity card project, which will be implemented within 12-18 months and, if successful, could be the harbinger of several e-governance projects.

Increasing the outlay for institutions of higher learning such as Indian Institutes of Technology (IITs) and National Institutes of Technology (NITs) to Rs 2,000 crore will help increase availability of skilled talent and boost innovation and research & development.