Budget 2004: Software
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Benefits under Section 10A/10B for IT companies to continue. |
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IT companies will continue to enjoy the benefits of 10A/10B benefits even after a change of management. |
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Pre-loaded software in computers to be exempt from excise duty. |
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Limit on overseas investments for companies increased from 50% of networth to 100%. |
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With increased competition, IT companies have been witnessing a significant decline in realisations (billing rates). Therefore, imperative for the companies is to concentrate on volumes for future growth. While IT majors have been spending on creating a strong marketing infrastructure, they would also be looking at mergers and acquisitions. Thus, the two announcements, extension of 10A/10B benefits in case of a change in ownership and increase in limit of overseas investments would aid IT companies that are looking at inorganic opportunities for long-term growth. Mergers and acquisitions in the IT sector could gather pace post the budget measures. |
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The hardware industry has been witnessing significant undercutting from the unorganised sector, which manages to evade the excise duty of 16%. Since the branded players cannot compete on cost, differentiation becomes the obvious strategy. Providing pre-loaded licensed software could give an advantage to the private sector players. Thus, exemption of pre-loaded software is likely to help the branded hardware manufactures. However, the main industry demand of lower excise duty from 16% to 8% has not been met. |
Budget Wishlist - Mr. Mohandas Pai, CFO, Infosys |
"I suggest an increase in the service tax to 14%, fully modvatable, so that the service sector contributes to the exchequer. This would offset some part of the decline in the revenues due to the decline in the excise duties." |
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Nasscom Wish list: |
| Taxation: |
| Tax incentive under 10A and 10B of the Income Tax Act should continue till 2010 and therefore, the tax exemptions for exports should be restored back to 100% (it was reduced to 90% in FY03 budget). |
| Income tax exemption applicable to overseas branch office for profits (from software services) that are brought back into India should be extended to overseas subsidiary. |
| All taxable services provided in relation to software (both computer and IT) should be exempted from the levy of service tax. |
| Exempt physical bonding of premises/equipment by customs under the various export promotion schemes. |
| Income tax exemption should be allowed for software units located in backward areas. |
| Infrastructure |
| To give impetus to e-Governance, ensure the compulsory 3% of the Government spending on IT is not only in hardware but in software and services in the proposed ratio of 40:30:30 |
| Environment |
| Sub sections 10A (9) and 10B (9) either be deleted or amended to specifically exclude de-mergers and amalgamations. If a change in ownership takes place on account of a de-merger or amalgamation then the IT services companies loose the exemption from income taxes. This is preventing mergers and acquisitions in the sector.
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Hardware industry wish list (CII) |
| Reduction of excise duty from 16% to 8%. |
| Customs duty on capital goods, imported parts and components including items of dual usage to be brought down to nil. |
| Budget 2000-01 |
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Budget 2001-02 |
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Budget 2002-03 |
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| Phasing out 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%
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Onsite services for companies located in STPS (Software technology parks) and EPZ (export process zones) to be exempt from taxation. This is also to be extended to software companies outside the STPs and EPZ.
Overseas investment limit for software companies increased to US$ 100 m or 10 times their export earnings whichever is higher.
FII limit increased to 49%.
Companies allowed use 100% for the ADR/GDR proceeds for investments abroad.
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The 100% deduction of export profits allowed to certain units under sections 10A and 10B of the Income-tax Act has been reduced to 90% for FY03.
Limit for overseas investments through automatic approval route increased from US$ 50 m to US$ 100 m.
The limit for joint venture investments up from 25% of net worth to 50%.
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| [Read more on Budget 2000-01] |
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[Read more on Budget 2001-02] |
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[Read more on Budget 2002-03] |
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| Key Positives |
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| Immense market potential - The IT service industry is estimated to be of the size of US$ 440 bn. Considering the sectors' revenues in FY02, the market share of the Indian industry works out to be a small 2%. With Indian companies offering far superior prices for their services on the back of offshore advantage, it is more than likely that their market share globally will increase in the future. |
| High productivity - Most of the software companies have shown dramatic increase in productivity. The revenues are directly proportional to number of billable employees and the multiplier has been increasing over the years. For product companies the multiplier is higher, as the same effort is sold over and over again. |
| Recognition as quality software providers - India is gradually gaining recognition across the globe as a world-class software services provider. This along with cost competitiveness has caused a lot of global majors consider India for their outsourcing needs. Best quality at least cost has been the competitive edge for the software companies. With global majors setting up offshore development centres in the country, the offshore model is gaining wider acceptance. |
| The ability to manage costs - The sector has shown tremendous resilience in the difficult times it is facing. While the topline growth has decelerated sharply, the companies have managed to limit the impact on operating margins by managing costs judiciously. The decline in operating margins seen for companies like Infosys is due to the companies stepping up selling expenses to garner a larger share of the markets as the future growth will be volume based. |
| Size of contracts is getting larger - As the Indian software companies gain acceptance in the western markets, the size of contracts that are being awarded is increasing. This is because the clients are rationalizing the number of vendors they are working with. While traditionally the size of contracts has been in the range of US$ 10 m to US$ 12 m, a contract of the size of US$ 50 m can make a considerable difference to the topline. |
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| Key Negatives |
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| US economic slowdown - US accounts for more than 56% of the revenues from software exports. A slowdown in the US economy has impacted the software industry's growth. As compared to 66% growth in exports for FY01, the IT services industry clocked a growth of 19% in FY02 (Nasscom). The growth in revenues from IT services is expected to be 22% for FY03. |
| Intense Competition - As a consequence of the tough economic environment, there is a price war raging. Almost all the companies have seen billing rates decline. To counter the value proposition offered by Indian IT services companies, global IT services companies are setting up offshore development centres in India. This is likely to increase competition for talent as well as well business and consequently may drag the margins of the Indian IT services companies. |
| Geo-political concerns - The tension between India and Pakistan affected the Indian software industry adversely. This has forced Indian IT services companies to develop business continuity and disaster planning services. Corporates abroad are now looking at the various possibility of minimizing risk to projects being carried out in India having vendors spread across different geographies. |
| Hardware - Unorganized sector gets an unfair cost advantage because of high excise duty applicable to the organised sector. This is the key negative for hardware sector. The excise duty on computers is 16%. The unorganised sector does not pay these duties. The assembled industry holds about 53% of the market share of the PC industry. Also, the penetration of personal computers in India is quite low at 3.6 computers per thousand people, as against 362 per thousand people in the US. |
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