Nasscom's budget reactions

[Frederick Noronha <fred@bytesforall.org>]

NASSCOM: "Union Budget 2002-03 strong on basics; but disappoints the Indian 
software and services industry"

    * NASSCOM disappointed by inconsistencies in tax regime under Section 
10(A) and 10(B) due to short-term revenue compulsions

    * NASSCOM voices concern over eroding competitiveness of SMEs and IT 
Enabled services

    * NASSCOM reiterates its demands for procedural simplicity and 
consistency in Section 10(A) and 10(B)


New Delhi, 28 February 2002

National Association of Software and Service Companies (Nasscom), the apex 
association for the software and service companies in India today welcomed 
the Union Budget Proposals as one that consolidates the ongoing reform 
process, focuses hard on key infrastructure issues, and recognizes the need 
to strengthen agriculture and rural development. However, NASSCOM is 
worried that inconsistencies in tax regime could hamper India s 
competitiveness in global markets.

In its pre-budget memorandum, NASSCOM had urged the government to maintain 
a status quo on the tax incentives to the software and service sector, 
which is likely to emerge as the largest exporter during 2002-03.

In the Finance Bill 2002, the Finance Minister has proposed a reduction in 
the deduction from 100 per cent to 90 per cent of export profits under 
section 10(A) and 10(B) of the Income Tax Act.

As recently as April 2000, the Finance Minister had announced a long-term 
tax policy in order to provide a stable policy regime for the software and 
services sector, wherein the tax holiday was announced for the decade 
ending March 2010. This policy had resulted in a large number of overseas 
investors making India a preferred destination to set up their software and 
back office operations.

While the revenue gains from the announced provision will only result in 
marginal revenues to the exchequer; it is clearly a retrograde step. 
NASSCOM understands from the Notes to the Finance Bill that this provision 
applies only for the A.Y. 2003-04.

Mr Phiroz Vandrevala, Chairman NASSCOM said, "we recognize that this 
provision is valid only for the coming financial year. However, such 
inconsistencies in the tax regime will affect the confidence of overseas 
investors in the Indian software industry; especially since other countries 
such as China, Ireland, Philippines are pulling all stops in providing 
incentives to attract FDI in this sector. Domestic companies will find it 
difficult to plan their future strategies and investments in light of the 
uncertainties created by inconsistent policies. Hence, we are confident 
that the government will withdraw this provision and abide by its 
commitments made to the fast growing, globally competitive software industry."

Mr Kiran Karnik, President NASSCOM added "in the current challenging global 
environment, Indian companies, especially SMEs and ITES companies are 
making significant investments in setting up sales and marketing 
infrastructure in the overseas markets. This withdrawal of tax exemption 
would reduce their investible surplus and affect marketing efforts during 
the year 2002-03."

NASSCOM is also disappointed with continuation of sub-section (9) under 
Section 10(A) and Section 10(B). As per this clause, if during the year, 
more than 51% of shareholding (beneficial interest) changes in a 100% EOU, 
STP, EPZ then the company will cease to get Income Tax exemption from that 
year. This provision adversely affects the ability of companies to raise 
funds either from capital markets or venture capitalists.

Mr Kiran Karnik said, "It hits all companies especially SMEs and start-ups 
in software and ITES space, where the shareholding pattern may change with 
the exit of venture capitalists. This may constrain venture capital 
funding. Moreover, this provision is acting as a deterrent to mergers and 
acquisitions, which is today seen as an important step for future growth".

NASSCOM welcomed certain provisions that are likely to enable larger 
software companies to strengthen their global competitiveness through 
acquisitions or alliances. These include
    * Indian companies being permitted to invest upto US$ 100 million overseas

    * Indian companies being permitted to make overseas investments in 
joint ventures abroad by market purchases without prior approval up to 50 
per cent of their net worth
NASSCOM also welcomed the lowering of customs duties on components and 
capital equipment for computer hardware, stating that this will improve 
competitiveness of domestic hardware producers, bring about a reduction in 
prices of computers and result in increased IT penetration in the country.

About NASSCOM

National Association of Software and Service Companies (NASSCOM) is the 
apex umbrella organization for IT software and service organizations in 
India. Formed in 1988, Nasscom s objective is to act as a catalyst for the 
growth of the globally competitive software-driven IT industry in India. 
Nasscom is a non-profit organization with over 870 member companies that 
collectively contribute to more than 95 per cent of revenues of Indian 
software industry. Its members include software, Internet and E-commerce 
companies spanning private, public sectors that include home-grown 
companies and multi-nationals. Nasscom is internationally represented at 
WITSA (World Information Technology Services Alliance) and ASOCIO (Asian 
Ocean Computing Industry Organisation).

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