Outsource the taxes?

Industry leaders wonder whether killing the golden goose was the only option before the finance minister.

It's up on the wall "" the Budget delivered nothing positive for the IT industry. Kris Gopalakrishnan, president, joint managing director and COO of Infosys Technologies, lays it out crisp and clear, "...the taxation proposals are neutral at best".

Tax increases in the corporate sector will greatly hurt sentiments since tax collections on the corporate side have gone up by 40 per cent, he says: "The increase in the dividend distribution rate and levy of 1 per cent surcharge on tax rates will lead to enormous negative sentiments."

The Indian IT-ITeS sector is expected to exceed $47.8 billion in revenue in FY07, an increase of 28 per cent, while contribution to GDP estimated to be 5.4 per cent is up from 4.8 per cent last year.

Multinationals were expected to pump in investments up to $10 billion in FY 2006-07. Nasscom president Kiran Karnik expressed his dismay at the extension of minimum alternate tax (MAT) on export incomes which were exempt under sections 10A and 10B. "This is a regressive step," he clarified.

Higher costs for leased space will adversely affect small and medium enterprises that do not own office space, reducing competitiveness vis-à-vis other destinations, reckons Ravi Venkatesan, chairman, Microsoft (India).

"The decision to levy MAT is disappointing as it results in increased costs by 1.5-2 per cent," he says. But Venkatesan does pat the FM for the Rs 33 crore allocation for the new scheme constituted for manpower development for the software industry.

"This is a good start towards skill development, improving the talent supply, and recognising the need to strengthen the talent supply for the IT and BPO industry," he finishes.

The prevalent sentiment is that despite creating 3,80,000 jobs in the IT sector, comprising 50 per cent of the total jobs created globally and the largest number of jobs in the organised sector in India, the Budget has imposed the fringe benefit tax (FBT) on employee stock options.

Deepak Ghaisas, CEO, i-flex solutions, agrees, "The IT industry had some expectations and I do not think the FM has taken them in to account and if he has introduced any measures, the impact of these measures is fairly negative."

The government should have considered extending the Software Technology Park scheme and Section 10A of the Income Tax Act beyond 2009, he adds.

Yet another puzzle that Chidambaram did not resolve was the much needed clarification over the SEZ scheme, which can put many IT companies from finalising their capital expenditure plans on hold.

However, the Budget has also awarded a pass-through status to venture capital funds focusing on knowledge intensive sectors in respect of investments in biotechnology, IT relating to hardware and software development, and nanotechnology.

"The benefit extended to the semiconductor industry is expected to attract investments up to $10 billion in the next 4-5 years," explains Bundeep Singh Rangar, chairman of IndusView.

According to him, this highlights the need to bridge the digital divide between developed and developing economies.

"The initiative will open the Indian electronic design automation industry estimated to grow to $43 billion by 2015 from the current $3 billion through mergers and acquisitions," says Rangar.