Investing in India? Get Equitymaster Research  
 Home > Research It > Economy > Budget 2001 > Software Sector
Share |

Software Industry



Budget provisions

  		•

    Phasing out of the exemption for export earnings over a period of five years. In the current year 20% of the earnings were brought under the direct tax net.

  • No approval required for Venture Capital (VC) funding

  • 'Pass through' on Venture Capital Investment: This means that either only the VC or the investor will pay tax. The Budget has laid down that the one time payment will be made by the VC and it has been set at 20%

  • Customs duty on computers, floppy disks has been reduced from 20% to 15% while that on CD ROMS has been reduced from 5% to nil.


    Budget impact


    The effective tax rate for software companies would work out to 7% on their pre-tax levels. To some extent a tax on software exports was expected and this would only hurt sentiment in the short term.

    No change in the tax of ESOPs (Employees Stock Options) which are taxed as a perquisite when the employees are given the option and as a capital gain when the option is sold. The ESOPs are one of biggest motivators for the employees in the infotech sector and a double taxation would dilute their since a notional tax would be imposed before any employee has been able to cash in on the option.

    Dividend tax of 20% on the companies could induce companies to pay out lesser dividends and pump back more money into expansions.

    No increase in acquisitions limit from the current limit of $ 100 m will increase the procedural hassles for cash rich software companies such as Infosys and Satyam.

    The positive impact on the sector impact will be
    Increase in the FII limit to 40%, which could propel further funds into the software sector.

    Relaxation in the rules relating to VC funding would imply that entrepreneurs would get access to finance in a far easier manner.

    Lower cost of hardware would mitigate the costs for the industry. However it would hit players such as HCL Infosystems (and to some extent Wipro) only partly since traders have also been brought under the 4% special additional duty.


    Industry wish list

    Mr. Subramaniam Vutha, Senior VP, Tata Infotech Limited says:

  • We must accelerate towards zero duty for all I.T. related items. The high cost of the dollar is already an impediment to the domestic IT industry

  • The opening up of the finance and insurance sectors would help IT sector development

  • We cannot rely on a single USP-we need world class infrastructure at real world prices

    Mr. Nithya, Legal Counsel, Infosys Technologies Limited says:

  • Implement all the recommendations of the IT task force immediately through notifications in relevant depts.

  • Acquisitions by Software Companies, without any limit and without prior approval ( presently the limit is $100m)

  • VCs - make taxation structure a pass through, similar to Mutual Funds

  • Remove procedural difficulties for IT Companies under excise and customs laws

  • SEBI to remove track record requirement for Start-up companies for enabling them to get listed in India in the early stage In summation, Indian Software companies have reached a critical mass and are poised for global scales. The budget should provide the necessary impetus for them to globalize.

    Mr. Ashank Desai, Chairman & MD, Mastek says:

  • Continuation of the tax benefits to the software industry

  • ESOP's to be taxed only once - on sale and not twice - on exercise and sale

  • Implementation of SEBI's venture capital recommendations

  • FII stake limit in software companies to be enhanced

  • Improvement of telecom and basic infrastructure

  • Government departments should allocate a portion of their budgets to IT investment

  • Government to take steps to enhance IT education and Human Resources in India to meet the projected software professional growth.


    Key Positives

  		•

    The Indian software industry seems to have been accepted for good quality software development and the industry too seems to have graduated to higher value added offerings.

  • Software demand is riding on the continued success of the USA economy. Outsourcing of software by companies in the banking and the insurance sectors in the domestic arena could provide the next growth impetus.

  • Cost differences are expected to continue for the foreseeable future

    		  

    Key Negatives

  		•

    With the offshore development centre (ODC) route being the key to better margins it is important that better telecom infrastructure be put in place. This absence of a proper infrastructure is the one thing that could derail the boom.

  • Managing growth (as well as deploying cash sensibly) is going to be a key problem for the industry as a whole.


    Budget Impact:  Software Sector Analysis for 2002
    Latest:  Software Sector Report