Budget disappoints IT sector

The software industry on Friday hit out at the government for increasing the minimum alternate tax and for ignoring the industry's plea for extending STPI scheme which would have continued to give tax breaks.

The Software Technology Parks of India (STPI) scheme would have continued to give tax breaks to the their export revenues beyond 2011 onwards.

"The finance minister did not announce any extension of the STPI scheme which we were expecting. We still have one more year to go as the extension will expiry in March 2011. . . we would take up the issue again," Nasscom president Som Mittal said.

Indian software export industry is set to touch $48.7 billion this fiscal and it is currently not taxed.

Most of the stock market listed IT companies reacted negatively to the government's inaction on the crucial STPI scheme, pulling the sectoral index

down marginally on a day when the overall BSE index Sensex was up by 175 points.

Companies such as TCS, Infosys and Tech Mahindra closed marginally lower than their previous day's close. Only Wipro was up slightly (0.98 per cent) at Rs 676.70.

Mittal, however, said it may not hit the industry yet but the association would demand some cushion for the small and medium IT companies who would be exposed without STPI benefit.

However, the country's sixth largest software exporter Patni Computers said "Budget has not addressed IT Industry's demand for extension of tax holiday under STPI scheme which is a significant negative for the industry".

The increase of MAT to 18 per cent from 15 is also a big dampener, said companies and experts.

Another IT firm Cognizant said by allowing STPI tax benefits to lapse, the competitive edge that the industry was enjoying over its global peers may have been blunted.

On MAT, Mittal said "Big IT companies are already paying MAT but the SMEs which don't get Special Economic Zone benefits would be hardest hit with this increase. We would urge the government later to revise this increase."

Consultancy firm Deloitte said that the increase in MAT and non-extension of STPI would adversely impact the industry, which has already been hurt by the economic slowdown.

Pranav Sayta, tax partner, Ernst & Young, said: "The fact that tax holiday due for expiry next year is not proposed to be extended, coupled with the hike in the MAT rate from 15 per cent to 18 per cent, will be a dampener for the sector".

Mittal expressed happiness that the anomalies in SEZ schemes have been removed. IT companies housed in SEZs would now get full tax benefits. Earlier these benefits were limited to a particular year.

In the Budget, the government also exempted pre-packaged software from the 10 per cent service tax, a move that could reduce the price of licenced products from  Microsoft, Oracle and others, though marginally. "Pre-packaged IT software with licence for right to its use is being exempted from service tax subject to certain conditions," Mukherjee said .

Microsoft, the world largest software company, said the exemption of the service tax on pre-packaged software is good news for IT retailers. Considering that packaged software was the only product in their portfolio that attracted service tax, its removal simplifies operations.

Hardware association MAIT said, "Exemption of Special Additional Duty (SAD) on pre-packaged goods for retail is also a welcome step as refunds for SAD were not forthcoming."

However, to sustain hardware manufacturing in the country in the long run, it is critical that SAD on the input components be exempted as well," it added.

Mittal also said that the service tax refund clarification is also a big booster for the sector. The move will help the sector as Rs 3,000 crore (Rs 30 billion) is awaiting for refund.

Hailing the exemption of pre-packaged licenced software from service tax, he said it may not lead to great price drops but is certainly a good direction for more usage of licensed software.