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Karnataka: Nets software for taxes

Mar 27, 2001

In the budget proposals presented to the state assembly on the 26th of March the Karnataka government has imposed a 4% sales tax on computer software, including programming, providing and leasing of computer software. Therefore, the tax is not only applicable to companies developing software but also those who are offering services in the Application Service Provider Model (ASP model). The budget has proposed an annual tax of Rs 2,500 on mobile phones service, Internet service, Internet cafes, information kiosks, and e-commerce. The government plans to raise an additional Rs 2.8 bn by bringing the new economy businesses under the tax net. A tax of a similar nature was in existence four years ago but the Karnataka government was persuaded to remove the tax. The government has brought this tax back in a sudden move to make ends meet. According to the chief minister Mr. S. M. Krishna said while the state was not facing a financial crisis, its "financial position is a cause for concern”. This could be interpreted as the state was on the brink of a financial crisis. The committed expenditures on interest payments, salaries and pensions account for 60% of revenue receipts. Therefore, the government instead of taking tough steps like reducing expenditure has found the easy way out.

The IT industry is puzzled as to how an mechanism is going to be imposed to determine the taxable income for corporates as software does not have to be distributed physically. It can be downloaded from the Internet. Sales tax can only be imposed on good delivered from the state. There is a going to be a lot of ambiguity, which not doubt will create further complications.

It more than evident that the worst affected are going to be the smaller business like Internet café owners and smaller software companies that address local markets and businesses. This would lead to harassment of smaller business. These bodies do not have much of a representation and they would hardly be able to put up a fight against the government. But help is at hand Nasscom has taken up the cause and will continue to lobby for the removal of this tax.

Major software companies located in Banglore
Company % Domestic
earnings
Wipro 52%
Infosys 1%
Satyam 2%
Digital 1%
Mphasis BFL 1%
Tata Infotech 48%
PSI 30%

As for the large software corporates based in Bangalore their major source of income is exports and they have development centres in other parts of the country as well. Therefore, they will not feel any tangible impact.

It would be very interesting to note how the government goes around implementing its tax collection drive. While the industry is rather surprised, in the neighbouring state of Andhra Pradhesh, Mr Chandra Babu Naidu, who has been giving Karantaka a run for its money, might have the last laugh. He has another song to woo software companies to “Cyberabad”.

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