The BT Budget MM Special: Debates; IT : Rebooted!..No, Crashed!

Even as HCL's Ajai Chowdhury has absolutely no hesitation in declaring that Budget:2000 is a dream come true for the infotech industry...

This budget has been a positive one for the infotech industry. It will contribute significantly to bringing about a boom in the infotech industry and the Net Economy. While Budget 2000 contains many provisions that will, directly or indirectly, benefit the infotech industry, I believe that the most relevant ones will be the initiatives along 5 different fronts.

SOFTWARE. There has been a lot of noise, with the software industry expressing fears of losing its competitive edge due to the tax- liability on 20 per cent of its export earnings. That is far from the truth. Most of the software players are located in Software Technology Parks (STPS), and most of them have 6 to 7 years to go before their 10-year tax-holiday is through. It is clear that the government, even though it was forced to do take this step due to the World Trade Organisation's pressures, has given reasonable time to the industry.

In the general brouhaha, the big gain, of the FII holdings being increased to 40 per cent, has been overlooked. The only dampener I can really talk about is Sinha ignoring the industry demand on Employee Stock Option Plans. This was definitely a big disappointment, but it is almost overshadowed by the other gains.

HARDWARE. For the hardware industry, the Budget has been a dream come true. By reducing the Customs duty on PCs and hardware components, Sinha has helped domestic manufacturers by making them cheaper, especially in comparison to fully-imported systems. On the cost front, it has been a kind of status quo for fully-imported systems as the Special Additional Duty (sad) that has been imposed on them does away with the benefit of the 5 per cent reduction in the Customs duty that was provided to them-a competitive advantage for the domestic manufacturers. This is a part of the original plan that the Prime Minister's taskforce had recommended, and sends out a signal that the government wants pc-manufacturing to be based in India. Another big help is the reduced price difference between pc manufacturers and the grey market. The grey market, which, basically, plays on not paying duty, will face a tougher competition from us. pc sales are, definitely, going to pick up especially since there has been a pent up demand for the last two months-one, due to customers holding back due to budget expectations, and two, due to the sales-tax imbroglio.

VENTURE CAPITAL. The government has clearly encouraged venture-capital funding by streamlining the entire taxation and registration process, and making SEBI the nodal agency for single-window clearance. There is, certainly, the issue of taxation of venture-capital funds, but the point to note here is that, for the first time, due recognition has been given to this sector, and an effort has been made to organise it as an industry.

INTERNET. The Net and its usage will get a major boost now as the setting cost of ISP infrastructure has been greatly reduced by extending the concessional Customs duty of 5 per cent for specified equipment to Internet Service Providers. This will have a direct impact on access prices, and should give a boost to the Net access and the telecom infrastructure as well, which had been a crying need, what with everyone clamouring for bandwidth. Reduction in the Customs duty on telecom equipment and optical fibres will, certainly, go some way in tackling the issue of bandwidth. Then, there will be a packet for the hardware industry as well, which will increase its sales to ISPs.

MOBILE PHONES. The massive reduction in the Customs duties on cellular phones and batteries will aid the Net and the hardware industry in an indirect way. pc-penetration in the country is now being linked to Net penetration. But if we take Net penetration, it is dependent not just on the pc, but on what one might describe info-appliances-which include both PCs and mobile phones. Amongst the two, PCs take the biggest share, but cellphones now have an important role to play in the future, especially with the coming of age of WAP and mobile Net access. And the two are, basically, complementary to each other. The decrease in price of one, and its consequent increased usage, will help the other as well.

Looking at all these benefits, I really have no hesitation calling this budget a pro-infotech budget. Of course, there were certain other positive things that might have been included, but one cannot expect an ideal solution, and this leap forward should be viewed in the right perspective.

..No, Crashed!
..IIS Infotech's Saurabh Srivatsava admits his utter chagrin at the fact that Budget:2000 does not go far enough for the infotech sector.

By Saurabh Srivastav

I really do not envy the finance minister his task of preparing the annual budget. Meeting rising expectations with limited resources is not easy. And yet, Yashwant Sinha did an admirable job last year. That is why, perhaps, my disappointment is greater this year. He has failed to realise that the world is in the midst of the biggest paradigm shift in its history. A revolution, powered by infotech, telecom, and the Net, is propelling us into a New Economy, where knowledge- and service-based industries will dominate. I refer to not just software, but domains such as Net-related services, content creation, call centres, medical transcription, telemarketing et al. Consultancy company McKinsey estimates this market for infotech-enabled services, at over $1 trillion, to be potentially even larger than software.

Fortunately, our talent-base and knowledge of English together give us a tremendous comparative advantage in this area. And our success in software has proved that we can compete globally and win on quality. We were bystanders during the Industrial Revolution but, if we play our cards right, we have the opportunity to become the world's preferred source for such services, which could generate employment in tens of millions, contribute to a half of our GDP, and transform India into an economic superpower-not just an infotech superpower.

I had, therefore, anticipated this budget to be a roadmap to show how we intended to consolidate and strengthen our position in this area, and not only meet, but exceed our target of $87 billion of software exports by 2008. I am afraid I did not find it. Easy, efficient, and inexpensive Net access across the country is absolutely vital for our success in knowledge-based industries. No concrete, bold, or imaginative steps were outlined for this, or for the rapid upgradation to world-class levels of our telecom infrastructure, which underpins the entire infotech revolution.

ESOPs are critical for us to retain our best talent; yet, the NASSCOM recommendations for ESOP taxation find no mention in the budget. As for venture capital, while the intent was well-meaning, the actual provision now discriminates against domestic funds as they must pay a 20 per cent tax while foreign funds will invest through Mauritius and pay not taxes. And why the retrograde level of 20 per cent when less-risky mutual fund investments-which do not create new employment or enterprises-enjoy a 10 per cent level of taxation?

Perhaps the unkindest cut relates to the NASSCOM recommendation of including infotech-enabled services under Section 10A/10B of the Income Tax Act. Not only did this not happen, these provisions have been abolished from April 1, 200, as also Section 80HHE. Clearly, all the excitement about infotech has blurred our vision, and we have become victims of our own hype. Sinha has confused the coming to maturity of a few companies with the maturing of the industry. The reality is that we are still young and small industry-95 per cent of our 700-odd software companies are still small-and, in global terms, not yet a force to be reckoned with. More importantly, the thousands of companies we will need to deliver $50 billion of exports by 2008 are yet to be born, and will need help.

Incidentally, the scrapping of Section 10A/10B from April 1, 2000, discriminates against new entrants which, 5 years from now, will have a 40 per cent cost-disadvantage vis-�-vis existing companies. This should be corrected by Sinha to say that these provisions will be applicable till 2010-replacing the current 10-year rule-so that new entrants enjoy the same benefits as existing companies. It is not at all my contention that exports of software services or knowledge-based industries should forever be tax-exempt. The question is one of timing. You must seed and grow before you can harvest, and I think we have acted, perhaps, 3 years too early.

We should have waited till we had solved the issues regarding Net access and the telecom infrastructure, allowed at least 100 companies to reach the Rs 100-crore ($25 million) mark, and seen the world's largest corporates make substantial investments in India for software and infotech-enabled services. By then, our brand would have been strong enough, and overseas investments deep enough to weather the competition from countries that are less expensive, or offered more incentives. We have succeeded in creating the right sentiment (no mean achievement in our country), and the world was sitting up and taking notice of us. I hope we have not acted in haste to repent at leisure.

Saurabh Srivastava is Executive Chairman, IIS Infotech