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Software sector on `healthy' growth track

Our Bureau

New Delhi , June 27

INVESTMENT Information and Credit Rating Agency of India Ltd (ICRA), has predicted a healthy growth for the software sector in the short- to-medium term, backed by a strong gross domestic product growth in the US. It, however, warned that issues like raising of additional tax liability on information technology (IT) companies by the Central Board of Direct Taxes (CBDT) could act as an inhibiting factor on the IT firms.

"Recently, the CBDT has slapped an additional tax liability on IT companies. Such imposition (denial of tax exemption to company units under Sections 10A/10B of the Income-Tax Act, 1961) has been made on the grounds that the assessees did not obtain separate licences from the Software Technology Parks of India (STPI) and did not keep a separate set of accounts for the units for which exemption of income as claimed," ICRA said in its latest report on the Indian software industry.

Stating that the tax demands that were slapped on various companies were "huge" (in Wipro's case it is Rs 261.4 crore), ICRA contended that regardless of the reasons, such measures would inhibit the software industry. On the outlook for the Indian software industry, ICRA said that the sector is likely to post a strong growth in the short-to-medium term and that a strong GDP growth in India's largest export market - the US, would have a positive impact on the growth rate of the industry.

On the downside, however, ICRA noted that the guidance estimates by software majors indicated a slowdown in the revenue growth for the first quarter of the current financial year, even as the guidance estimates for the entire year remained strong.

"This may be attributed to a possible slowdown in the revenue growth from Business Process Outsourcing (BPO) services," the report issued in May 2004 said.

Additionally, a Bill attempting to curb the use of L-1 visas was introduced on May 20, 2003, in the US House of Representatives, it said. One of the clauses of the Bill was that the employees coming to the US using an L-1 visa would not be allowed to work at the site of any employer other than the company applying for the L-1 visa.

The report concluded that this could potentially impact Indian companies that have been using employees with L-1 visas for onsite work.

"Also the Indian companies cannot now use the H-1B visa route instead, as the cap has been exhausted. This may result in a shortage of visas, forcing Indian companies to look at alternative avenues, including increasing local hiring in the US," ICRA said, but pointed out that despite the potential downsides, the growth rate of the Indian software industry is likely to be strong.

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