Union Budget: Reactions to actions

06th July 2009
Union Budget: Reactions to actions

There is a story about a former Chief Minister of the state of Karnataka – whose capital, Bangalore was then, slowly morphing into the national’s infotech capital. A canny man who recognized what the industry was doing to put his state on the global outsourcing map, he also realised that it would best work if left to do its job its own way. His advice to his senior flunkies was “ If you can’t help them, don’t hinder them”. In real terms the state did precious little to grow the IT brand equity of Bangalore. But there were no complaints. Indeed, when compared with the capacity for destructive interference of some of his successors, this CM is now remembered with nostalgia by the industry. To be left to do your job now seemed like cyber heaven.

Today’s Union Budget 2009-10 seems to have left the Indian IT industry with similar feelings -- thankful for small mercies and even more thankful not to be slapped with seriously retrograde measures. Which is why the industry associations as well as individual industry leaders who have come out with their comments -- we know our readers have a variety of interests and agendas, so we reproduce these comments as fully as space permits, below – are all determinedly upbeat about the little goodies that the Finance Minister has thoughtfully provided to keep the babalog happy: yet another piecemeal extension of fiscal benefits to the Software Technology Parks by a year, when what the companies looked for was a clear roadmap for at least five years; a little tinkering with the taxation system for packaged software – clearly the industry is expected to have developed amnesia about the promises of a decade ago to gradually do away with tax on IT hardware and software altogether… part of our commitment to WTO. The Fringe Benefit Tax goes – an aberration that sought to punish industry for trying to attract young Indian talent by offering them some minor freebies. Having made a high profile appointment to the national mission on a Universal ID system, the government allocates a paltry amount, what we in India called a ‘token’ – the equivalent of $ 25 million – which going by past experience will just about pay for office space, travel bills and the salaries of the staff. Mr Nandan Nilekani will have his work cut out.

None of this the stuff of serious fiscal incentives to encourage India’s most spectacularly successful industry segment to continue tracking on the global competition. None of this even peripherally addresses the hurdles that stand in the way of empowering a billion plus Indians with the tools for self empowerment that computers and telecom can give them. But then like the industry leaders whose views can be found below, maybe we should count our blessings and like the sundial, recall only the sunny spells --Anand Parthasarathy

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Impact of budget on Indian IT industry: Views and quotes

National Association of Software and Service Companies NASSCOM:
Som Mittal, President: “The Finance Minister’s decision to extend fiscal benefits available to the industry under Section 10A/10B for one year will help the industry mitigate the impact of the current economic environment and help India retain its competitiveness.”

Pramod Bhasin, Chairman : “Many of the initiatives in this year’s budget recognize the role the IT BPO industry can play in promoting inclusive growth and creating substantial employment opportunities in the country. The industry will be keen to partner with the Government in expanding e-governance initiatives including modernization of employment exchanges, the UIAD project, and smart cards for healthcare services so as to achieve enhanced governance. Increased capital outlays on the education and infrastructure sector will also address growth challenges that the country has faced.”

The Budget proposals also address NASSCOM’s recommendations relating to multiplicity of taxes on packaged software, creating a dispute resolution mechanism on transfer pricing, abolishing FBT and issues on service tax refund. The combined effect of these proposals will facilitate the industry and its 2 million workforce to compete effectively and sustain India’s advantage. NASSCOM will continue to examine the fine print and seek clarifications as needed.

Manufacturers Association of Information Technology(MAIT) Vinnie Mehta, Executive Director:

We welcome the government’s decision to maintain the current excise and custom duty levels on IT products and components. The hardware industry supports long-term stability in policies and duty structures as frequent changes adversely impact the investment and business plans of the industry. Further, the focus given to education especially for the ‘mission in education through ICT’, increased allocation for upgradation of Polytechnics, IITs, NITs is indeed very welcome. This is as suitably skilled human resource is critical to sustain the competitiveness of the IT industry in country

We are glad that the Hon’ble Finance Minister has unveiled the roadmap for GST, which is very critical for creating a single-India market. This calls for unification of the rate on excise duty and the service tax. The service tax continues to be at 10% while the rate of excise duty is 8%. Going ahead, the industry expects better involvement and engagement with the Government as the finer details of the GST are worked out.

Further, the Union Budget has also addressed the issue of taxation on packaged software. The licence/right to use part of the value of the packaged software would now be subjected to service tax only and not Excise duty/CVD, this is as per the industry’s recommendation. However, the issue of State Governments’ levying VAT on ‘software’ already treated as ‘service’ remains unresolved.

It is heartening that the Hon’ble Finance Minister has recognised the strong potential of the electronics hardware industry. In this regard, the announcement of reduction in customs duty on LCD panels and exemption of CVD on parts and components of mobile phones for manufacturing these products locally is truly welcome. However, to sustain hardware manufacturing in the country in the long run, it is critical that SAD be abolished on finished goods and components or made at par with the CST.

Lastly, MAIT welcomes the creation of the Unique Identification Authority of India (UIDAI) which will go a long way in addressing the security and challenges of the governance in national programs especially for the poor. Similarly, modernisation of employment exchanges and creation of integrated web portal would allow for better mapping of skill sets with suitable jobs ensuring transparency and better productivity.

Indian Semiconductor Association:
B V Naidu, Chairman

The India Semiconductor Association ISA today applauded the government’s step in extending the STPI tax holiday for technology export firms from March 2010 to March 2011. It would be of special relevance to SMEs. Addressing the issues of transfer pricing and removal of fringe benefit tax were the other positive steps. These steps would attract talent to the knowledge sector and improve the competitiveness of India.

Weighted deduction of 150% on in-house R&D expenditure available to all manufacturing businesses will provide a boost to domestic R&D efforts and is a welcome move. Up-gradation of polytechnics could create employment opportunities in the manufacturing sector with a pool of qualified and trained talent. Basic customs duty of 5% applicable on import of set top boxes is an incentive for domestic manufacturing. Reduction of custom duty on LCD panels and exemption of CVD on parts for mobile manufacturing will also help the manufacturing industry.


Prasanto K Roy, Chief Editor, ICT Publications, CyberMedia
This budget is stable and has some right directions, from spending on infrastructure, to rural development, to abolition of the convoluted FBT. But it could have been much bolder, coming on the heels of such a strong and clear mandate. With no 'pain in the left' to worry about, it did not need to take short-term, baby steps. I guess the fiscal deficit sword has been dangling over the government.

For instance, the one-year extension to the STPI scheme is disappointing. I was hoping for a clearer signal, so that the services exports industry could stop worrying and focus on recovery and growth in the mid-term.

"The Unique ID project had really got a shot in the arm from Nandan Nilekani's appointment, backed by cabinet rank, to head it, and this Rs. 120 crore budget will help start it off, but I doubt if it can see it through till the end, unless they invent a smart card that costs a few paise

IDC India: Kapil Dev Singh, Country Manager

Budget has little for the IT industry to celebrate. Balances short term challenges with long term priorities, though not a populist budget!
The strategic intent of the Union budget 2009-10 is a fine interplay of short term challenges and long term direction as it aims to tackle slowdown with an eye on restoring 9% GDP growth, adding 1.2 million jobs annually, cutting the number those below poverty level by half by 2014.

Software exporters have to contend with “a year at a time” extension of STPI scheme. The FBT abolition means lower administrative burden, bringing shine back on the ESOPs.

Wall St Journal/ Paul Becket
A Budget for a Second-Tier Developing Nation
That was, in sum, a pretty dreadful spectacle.
Finance Minister Pranab Mukherjee had the chance in this budget to articulate a clear, expansive long-term vision for the nation through the government's financial priorities. He had the chance to consolidate the gains India already has made in moving beyond the global financial crisis. He had the chance to convince investors both domestic and international that the reform agenda of the last administration, hampered by the Left Front, would be advanced now that the government has a mandate for change.
Instead, we had honey bees collecting nectar without harming plants….And then, the piece de resistance, said with a dramatic flourish: The announcement, honorable ladies and gentlemen of the Lok Sabha, that for the first time the Indian government will spend more than 10 lakh crore rupees (about $208 billion) as if that was what counted the most, not how the money would be spent or how it would be raised. Sorry, but that's not a boast worthy of an aspiring global superpower (which India justifiably is) but of a second-tier developing nation.
Clearly, what all that cash will mostly be spent on is the kind of populist endeavors that you'd expect from a government that is running for re-election, not one that was just returned to office. The targets of returning to 9% growth, spending 9% of Gross Domestic Product on infrastructure development by 2014, and creating 12 million jobs a year for the nation's youth all are worthy goals. But the speech was woefully vague on how any of them would be achieved.

IT professionals of Bangalore have mixed feelings on budget

Most of Bangalore's youngsters who are either employed in IT and BPO sectors or are hoping to get employment in these sectors are disappointed that no specific action plan has been charted out to bail out the industries in the wake of the global economic recession.


Sudip Nandy, CEO, Aricent.
Aricent welcomes the Union Budget 2009 as it delivers on quite a few of the expectations of the IT industry. We are particularly pleased with the one year extension granted to the tax holiday scheme as it would greatly benefit the SMEs especially given the tough market conditions faced due to the downturn. It is heartening that the finance minister has abolished the Fringe Benefit Tax and double taxation on the packaged software which will simplify business.

We are also very pleased on the budget’s focus on infrastructure, job creation and most importantly education especially to improve the quality of the existing IITs and NITs.”

“However, the increase in MAT is a bit of a concern as it could impact current cash flow for companies. Although, as we come out of tax holiday and the effective tax rate increases, this increase in MAT could eventually get offset against higher taxes in future years”

Cadence Design Systems India:
Jaswinder Ahuja, Corporate Vice President and Managing Director

The Union Budget announced today seems to be pro-development and has made some welcome allocations towards infrastructure creation and betterment as well as social welfare projects.

The budgetary allocation towards schemes such as the unique identity number for every Indian enabled by the creation of the Unique Identification Authority of India (UIDAI) will set the tone for future public private partnerships as well. Apart from establishing a foundation to deliver better governance it creates new opportunities for the semiconductor sector.

Reducing customs duty on LCD panels and introducing customs duty on set-top-boxes both signal a pro-manufacturing agenda, which is much needed.

Scrapping the Fringe Benefit Tax (FBT) provision, increasing the slab for personal income tax and abolishing the surcharge on Income Tax are welcome measures. Extension of the STPI scheme for one more year is a good step, however the government needs to think of an appropriate scheme that incentivizes SMEs to foster innovation in the knowledge sector”

HCL Infosystems limited: Ajai Chowdhry, CEO and Chairman

Overall this budget is good for the IT sector with certain facets that are encouraging for the sector. However, ICT Industry was looking for more support from the Govt. We had recommended a 100% depreciation on financing of IT equipments which was not included. On taxation aspect, the excise/CVD exemption is unclear as it was not stated whether VAT is included in this or not. The Govt. has also put a huge focus on R&D and it is good to see continuity of fiscal stimuli by the Govt. Various projects and schemes announced by Govt, will require increased role of Information Technology for eg. - the UID project. It is critical now to implement these projects at the earliest.

Other encouraging measures include the ‘Mission in Education through ICT’ which has been substantially increased to Rs.900 crore and the provision for setting up and up-gradation of Polytechnics under the Skill Development Mission enhanced to Rs.495 crore. More and More should be done to give an impetus to ICT in Education and Literacy. It was also discouraging to see that the extension of the sunset clause was only for one year which ideally should have been extended for a longer period.

Zinnov Management Consulting Pvt. Ltd. Praveen Bhadada, Engagement Manager

‘Piracy to reduce’ in domestic software market and therefore sales would go up: This will be as a result of the exemption of the value attributable to the transfer of the right to use packaged software from excise duty.

Huge opportunity in the BFSI segment:
With the mandate to increase the banking network in the country, this is an opportunity for banks to go to un-banked markets. This would in-turn provide an opportunity for Indian IT services companies to help the sector with solutions like centralization of core-banking system in these un-tapped geographies.

Growth opportunity for system integrators, software sellers and managed services providers to tap into the huge pie of the education sector in the country:This would take place as a result of the provision for the scheme, 'Mission in Education through ICT’.

India would see new set of companies coming in to explore further opportunities, with minimal tax hassles:
If the Central Board of Direct Taxes (CBDT) is able to formulate 'safe harbour' rules to resolve issues around transfer pricing by next year (considering that the STPI exemption is only for a year now), new companies would look at India as a growth market.

Cisco: Naresh Wadhwa, President and Country Manager –India and SAARC

On the face of it, the budget put forth by the government is positive and focuses on inclusive development. It is encouraging, especially the fact that there is a thrust on infrastructure development, rural development, education and social welfare. The impetus to infrastructure development – both urban and rural - is a highly visible and much welcome component of this budget.

Leveraging technology as a tool for accountability, better governance, in business and administration is a step in the right direction. The allocation of funds for e-governance investment schemes like the unique identity number for every Indian and the formation of a Centralized Processing Centre (CPC) in Bengaluru to process electronically filed tax returns will enable effective delivery of public services through public private partnerships.

The increased budgetary provision for the scheme ‘Mission in Education through ICT’ will help take the benefits of IT to the grass roots in a critical sector like education.

The ‘Aam Aadmi’ i.e. individual tax payer will definitely appreciate the abolition of Fringe Benefit Tax and raised exemption limit for income tax.”

Sybase: Sunil Jose MD India and Subcontinent
The investment in infrastructure for the growth of economy is critical. If what is promised in this budget of removing the bottlenecks for speedy implementation of infrastructure projects is implemented, then we will definitely see a rise in our industrial development and India will witness a multifaceted progress after the revival of economic slowdown.

The refinancing of 60% of commercial bank loans for the PPP projects in critical sectors like telecommunications, power generation, airports, ports, roads and even in railways will definitely bevery encouraging for software vendors such as Sybase who predominantly provide IT solutions like Business Intelligence and Enterprise Mobility in these segments.

On the 'corporate common man's' space, the most welcome change is the complete removal of the Fringe Benefit Tax (FBT). The FBT provisions were felt to be too burdensome and generated a huge administrative liability on corporate. FBT was also levied on employee stock options (ESOP) granted by an employer to an employee. Subsequent to this levy, ESOPs which were one of the best tools to attract and retain talent had lost its sheen. End result, the removal of FBT tax will induce people to buy more and thus help the economy in the long term.

Zicom Electronic Security Systems Ltd.-
Manohar Bidaye, Chairman

The Union Budget of 2009 is below the expectations of India Inc. Although the budget gives greater thrust on infrastructure development and social security, there is absolutely no change in direct tax structure and custom duties. The Budget has also not provided any stimulus for the security industry which was much needed on the backdrop of 26/11 terror incidence. This is very disappointing.

Having said this budget provisions upto Rs. 3,700 crore for Common Wealth Games 2010 to be held next year will definitely prove beneficial for the security industry as securing Common Wealth Games is major priority for the Government.

Globsyn Group: Bikram Dasgupta, Chairman & CEO

The move to set up central university in each state and redefining the investment for higher education by setting up of more IIT’s and IIM’s are indeed steps in the right direction.

On the Information Technology sector :“Extension to the STPI scheme is welcome as also defining the software product as a service. However much is left for the SME sector of Software Industry to give it a further fillip in order to march the growing requirements of the economy.”

Kale Consultants Ltd: Vipul Jain- CEO & MD

The finance minister has provided a balanced approach to the budget : in face of the economic conditions, the focus is rightly on driving the demand by giving incentives to the agriculture/rural sector.
With respect to the IT sector, the 1 year extension of the STPI scheme is welcome but a longer extension would have definitely helped the industry. Initiatives towards abolishing FBT and increase in tax exemption for salaried employees is commendable. However, an increase in MAT could have been avoided.

Cognizant: R Chandrasekaran, President and Managing Director, Global Delivery

The extension of the sunset clause on STPI by a year is welcome. While this will benefit the entire industry, it will specifically benefit the small and medium sized companies in the industry that needed this critical impetus for growth. This is also important in this turbulent global economic environment, in the context of emerging locations such as China, Philippines or Vietnam continuing to offer attractive tax incentives.

A substantially higher outlay for institutions of higher learning such as IITs and NITs should increase the R&D throughput and innovation quotient in a material way. At a time when industries are undergoing structural changes globally, it is innovation that can catalyze the next phase of growth. The support provided by way of subsidy for poor students pursuing higher education should provide the required impetus for enhancing the overall employable talent pool. The modernization of employment exchange under the PPP (private-public partnership) mode will help align skills with available employment opportunities at the national level and on a real time basis.

The abolition of fringe benefit tax is also welcome since the administrative hassle involved in FBT compliance was very high.

The clarity on transfer pricing assessments and the setting up of an independent dispute settlement mechanism is something that the industry sought. That the Finance Minister has announced an industry-specific safe-harbour provision will be notified, will help in resolving assessment issues relating to transfer pricing.”