So what’s the message for the information technology sector from the budget last week? I wish I knew, and my guess is that policy-makers do not know much either. I am not talking about hardware but about software and IT-enabled services.
The budget has increased the minimum alternate tax (MAT) on companies to 18 per cent from 15 per cent, and that’s bad for small IT companies that would have used the cash to grow. It is not a bad thing in itself, but for the fact that another end of the spectrum the policy on special economic zones (SEZs) is specially designed to help larger companies, because only they have the scale that would enable them to get special tax benefits. So, the small companies in the IT sector seem to be losing at both ends. Surely that’s not a level-playing field?
On the other hand, the time is ticking away for the extended “sunset clause” that exempts IT firms’ export earnings from corporate tax. This benefit available to the companies under the Software Technology Parks of India (STPI) scheme is due to end in 2010-11 and the IT industry wants to extend it further or bring its gains to the SEZ scheme.
Pray why? With the US dollar at around Rs 47 — which is cheaper than it was in 1998 despite a decade of inflation intervening — it is time to realise that dollar earnings are no longer “precious” the way they were in the previous century. It is time to bring IT firms on the same footing as manufacturing companies.
At the same time, any positive discrimination in the garb of an SEZ policy is also not necessary. Manufacturing firms perhaps deserve it a bit if they compare their infrastructure with that of China, but software and business process outsourcing (BPO) companies rely less on power, highways or ports and hence they are better off asking for public transport or better investment in education.
A day after the budget, I was at the TEDx meeting in Gurgaon (a gathering of free spirited knowledge speakers) and heard Osama Manzar of the Digital Empowerment Foundation that works for IT at the grassroots moan about how Indian MPs do not have any meaningful Websites and also on how you can use IT to store and capture traditional knowledge.
The budget did a spot of good IT spending in raising the allocation for the Unique Identity Project led by former Infosys CEO Nandan Nilekani to Rs 1,900 crore from Rs 120 crore. That is the way to go.
Rather than give awkward tax breaks or rates that encourage discrimination between firms, the government must move to a regime that spends more on e-governance IT to improve the lot of people and encourage a knowledge culture. It should spend more on IT, and pamper it less.