Post Budget Reaction for Information Technology Industry

Post Budget Reaction for Information Technology Industry

Writer: Mr. C R Vinay, Co-Founder, Chairman & Managing Director, Customer Centria

In the post recession period there has been a phenomenal change in the fortunes as well as the working styles of the different industries. The economic slowdown was like a jolt unexpectedly forcing the companies to do a serious introspection on their policies. With layoff notices, unpaid leave and 'on the bench' becoming the most commonly floating words around, the Indian workforce tasted recession, the worst import of the West. Not only were the industries forced to cut on costs, they were also asked to justify their spending and revenues and to add value to every expenditure they made.

One of the worst hit industries in the aftermath of recession was the IT industry of India. Once the blue-eyed industry of the west, especially US, the Indian IT companies were an instant hit due to their large talent pool of English speaking workers. After experiencing the dot com downfall, this is the second time the US is facing a decline of revenues in the IT sector. The recession this time might not be similar to the dot com bubble burst of the 90s but the impact is more or less the same. There are confirmed reports that IT budgets in a number of industries in the US and UK, have been nearly halved. After project cancellations and lay-offs, a number of Indian IT workers in the US were asked to leave. The situation has been aggravated further by southward movement in the billing rates, a longer payment period cycle and increased competition from other low cost destinations.

With a much more stable UPA back in its second innings, India's Industry was hopeful that this budget would rev up the industry and bring back its former glory. The IT/ITes industry that contributes around 6% to the national GDP has high expectations from the Union Budget 2009. The demands were few and fair.

• The demand of the industry was to extend the tax holiday by another decade as the growth is on a steep decline in the last one year due to recession globally. The recession and the lack of tax subsidy are resulting in businesses to layoff teams. There is a need for a stable policy regime for the IT hardware industry and for growth-oriented measures to boost domestic IT consumption. The STPI extension in this regard has come as huge relief to the IT sector. Even though the tax-holiday has been extended only for a year, it still will be able to give the recession hit industry support and stamina to revive itself.
• Tax analysts feel that even though the tax savings from this holiday might not be able to make up for the huge losses      these businesses have suffered globally, it still is going to be beneficial. Extension of the 10A/10B extension will surely provide a breather. This is particularly important for SMEs to facilitate their continued growth, which might not have the right resources to move into SEZs. This will also facilitate move into Tier 2 and 3 cities. The extension of this scheme is an important and necessary step to ensure continued growth for this sector.
• For the employees, abolition of fringe benefit tax (FBT) will make ESOPs (employee stock ownership plan) more attractive. Transfer pricing was a cause for concern. The IT industry has been one of the biggest contributors to the FBT tax, due to its high expenditure in terms of traveling, hospitality and ESOPs.
• There was also a much-required need for a new tax structure on the e-commerce businesses. The Information Technology Act, 2000, which is the first legislation to deal with electronic commerce, is silent on taxation. Substantial amount of state revenue, which is generated through direct and indirect taxes, is lost when Internet transactions remain untaxed. The removal of FBT for the industry and employees to emphasis on key e-governance projects has come as a major breakthrough for the sector of e- governance. It is heartening to see investment in key e-governance projects with an emphasis on important initiatives like unique ID programme. The excise duty exemption on packaged software is also a positive step.
• One of the main reasons behind the success of India's IT sector over the years has indeed been the tax holiday which has helped these firms plough back their earnings and fund their growth, especially given the fact that the banks have been loath to funding IT companies. Primarily, the sector had been asking the Finance Ministry to clear the mist around tax anomalies. This budget has helped cleared a lot of confusion on the multiplicity of taxes on packaged software.

Brief profile of Mr. C R Vinay

Co-Founder, Chairman & Managing Director

Vinay is an MBA in Marketing and Information systems from a premier institute in India with more than 13 years of experience in Advertising, Marketing and Technology. His vast global experience ranges from providing Marketing and Advertising consulting to leading companies in India to Analytical CRM and Analytical Marketing consulting to leading enterprises globally. His penchant for Customer Management coupled with his strong background of technology-driven Marketing focusing on driving a globally competent Customer Management company. He is driven by the belief that every enterprise needs to get Customer Centric in order to maximize all round value. 

Thanks and Regards.