The Hindu Business Line : Silence on STPI leaves IT industry dismayed

The IT and BPO industry, which had been hoping for an extension of STPI scheme beyond March 2009, was left disappointed today as the Union Budget did not offer any relief to companies amid a difficult market condition. To top it, the cost of software is set to go up as the Budget has increased the excise duty on packaged software to 12 per cent from eight per cent, while bringing customised software under the service tax net.

“We are disappointed that the STPI scheme has not been extended. This was critical for SMEs and BPOs. Also, the service tax of 12 per cent on customised software and higher excise duty on packaged software would lead to increased cost of IT and could slow down the domestic IT usage. This particularly impacts SMEs who have just started deploying IT. It may also lead to a rise in piracy,” the Nasscom President, Mr Som Mittal, said.

Mr Ravi Venkatesan, Chairman, Microsoft India, said that the cost of software would increase for users as a result of the Budget announcements. “This will have an adverse impact on IT penetration as end-customers - like small businesses, home users, government, academic institutions and NGOs - will be unable to avail the tax credit,” he said.

Asked if iFlex, which sells software packages and customises them for banks, would be impacted Mr Deepak Ghaisas, Vice-Chairman of the company, said, “The services tax alone would apply to us.” But even that, he said, is unfair. Since imported software does not attract customs duties, the Government is essentially discouraging Indian companies in our field of work.” He also said that it is not yet clear if there would be a countervailing duty on imported software since that would make the field level again.

Mr Bharat Goenka, Managing Director, Tally Solutions, which sells packaged software in India came down sharply on the rise in excise duties on software. He said, “Nowhere else in the world do we have excise duty on software. It is meant for the manufacturing sector which could offset excise duty against duties on input costs but not for software where such opportunities do not exist.” Now, he said, users would be willing to buy from Tally, which could offer them an excise bill but that a dealer would not be able to. “Without the dealer channel, the packaged software industry is finished.”

Terming the budget as “populist”, Mr Rostow Ravanan, CFO, MindTree Consulting Ltd, noted that it did not offer the IT industry any reason to cheer. “The introduction of service tax on customised software, in particular, is a big dampener for our domestic business. Besides, the STPI scheme has not been extended, despite it being a wide-spread demand,” he pointed out.

The IT sector has been pushing for continuation of STP scheme and tax incentives under Section 10 (A)/(B) for the next 10 years, arguing that such an extension would enable companies to stay competitive particularly as other countries are busy doling out sops (tax holidays, free space, superior infrastructure) to attract MNCs and even Indian companies. The tax holiday has been a key factor in the growth of the Indian IT and BPO industry in India, and the demand for its extension assumes significance as export-oriented IT companies are already battling rising wages and real estate costs, a potential slowdown in the US — their largest market, pressure on margins and the impact of an appreciating rupee.

The CFO of Satyam, Mr V. Srinivas, said, “if the STPI sops were not extended beyond the year 2009, it would impact not just small and medium companies but also Satyam. While it would take about a year to fully transition to the special economic zones, for the year 2009-2010, the tax incidence will be higher at about 22-23 per cent up from 13 per cent now. But with SEZ’s it would revert to 13 per cent in 2010-2011.”

“It is unfortunate that the FM has not announced any initiatives for BPOs. The BPO industry is relatively new compared to the mature IT industry (which is 20-25 years old). The industry must take this issue up with the FM,” Mr S. Bala, Senior Vice-President, APAC, Sutherland, said.

On similar lines, Mr Susil Kumar, CEO, Intelenet Global Services, said, “The extension of the tax holiday would have softened the impact of rupee appreciation, which has put pressure on the bottomline of BPOs.” On the positive side, the Finance Minister has proposed to enhance the allocation to Department of IT from Rs 1,500 crore in 2007-08 to Rs 1,680 crore in 2008-09.