Sectoral Impact

Software

Tax sops to boost M&A

The information technology (IT), software and services industry welcomed the fiscal incentives saying these would provide relief to the industry and encourage growth of the sector.

Nasscom, the apex industry association of IT software and service companies, has welcomed the government’s proposal to retain full tax exemption under Sections 10A/10B to the industry as committed and originally envisaged.

Nasscom has also lauded the government’s move to amend the clause in Section 10A/10B of the Income Tax Act which was holding back acquisitions and mergers.

Terming it as a long-term approach which would help the industry consistently contribute to the economy, Nasscom chairman Arun Kumar said this will help continue the growth momentum of the Indian IT and ITES (IT enabled services) industry.

With the government removing this stumbling block, consolidation, especially in the small and medium sized enterprises sector, will be facilitated in a big way.

Hardware

No help for IT manufacturers

The wish-list of the hardware sector has been largely ignored, while a few of the Budget proposals will have a modest impact on the industry. Retail prices of IT products are likely to see minimal drop or no change at all, industry experts feel.

First, the excise duty on pre-loaded software has been removed. Software does not attract any excise duty when sold separately but does when bundled with hardware. This move will result in marginally lower prices for customers who get the hardware bundled with the software.

Second, Customs duty on specific electronic components has been reduced from 25 percent to 15 percent but most of these are already being imported at less than 15 percent Custom duty rates or used by export-oriented hardware firms (which do not pay customs tax on imports), industry executives say.

The proposal to reduce Customs duty in line with the commitment to the World Trade Organisation requires further study. “The exemption of excise duty on pre-loaded software should result in a 2 percent lowering of cost for branded personal computers,” says MAIT president S Devarajan. He was, however, disappointed as the excise duty on computers has not been rationalised to 8 percent as desired by MAIT. On the retail front, there would hardly be any change in prices due to cuts in the tax rates on some of the hardware components, say industry experts. “There has been no change as there has been no concession for the hardware industry,” Zenith Computers managing director Raj Saraf said.

“The fundamental reform in the introduction of value added tax will lead to increased use of IT,” said TVS Electronics director Gopal Srinivasan.

Training

Training institutes in tax net

The widening of the service tax net is likely to bring in software training institutes under its fold. The 2003-04 Budget has identified ten additional services that will be taxed and this includes vocational training. Software training institutes, experts feel, will fall under vocational training.

“IT education and training would be brought under the purview of an 8 percent service tax. This would be highly detrimental to the interests of the industry, the hundreds of thousands of students enrolling for an IT training course and by extension to the IT services industry,” said SSI chairman and CEO Kalpathi S Suresh.

The IT education industry has witnessed a dramatic fall in revenues in the last few years. It has experienced a 40 percent decline in size from Rs 2,300 crore in FY01 to Rs 1,575 crore in FY02. The cost may have to be partly borne by the companies. It may be difficult to pass on the entire tax to the students given the IT education environment.

Telecom

Excise sop for handset makerss

In what could encourage telecom companies to set up handset manufacturing facilities in India, the Finance Minister has exempted mobile handset and its components from excise duty in the Budget.

This would mean that manufacturing handsets in India will now be much more financially viable and the excise exemption can give a commercial advantage to the companies as compared to importing the handset.

After the government removed countervailing duty (CVD) which was to the tune of 16 percent on import of handsets in last year’s Budget, imports had become a cheaper option as compared to manufacturing them in the country.

The import duty on handsets is currently at 10 percent with a special additional duty of 4 percent while excise duty is 16 percent.

LG Electronics vice president (CDMA terminals) KK Kushwaha said, “Exemption from excise will encourage manufacturers but the decision to set up manufacturing will also depend on the size of the demand (volume) and business viability.”

“With an annual 10-million handset market in the country, setting up manufacturing facilities will also be financially viable,” MAIT executive director Vinnie Mehta said.

However, Indian Cellular Association (ICA) president Pankaj Mohindroo was unimpressed with the excise exemption.
“It will not have any immediate impact as there is virtually no handset manufacturing happening in India at present,” he said.