The Budget for 2008-09 has been largely disappointing for the IT and BPO sector. The industry had hoped that the Finance Minister would favorably consider various initiatives, such as:

• Extension of Software Technology Park of India (STPI) schemes beyond the FY09 end (March) deadline
• Removal of Minimum Alternative Tax (MAT) for initial 5-10 years for new BPO centers
• Abolition of Fringe Benefit Tax (FBT) on stock options (ESOPS).

While none of these issues were touched upon in the Budget, the biggest letdown was the Finance Minister's silence on the extension of the STPI scheme.

Some of the recommendations by the Finance Minister of relevance to the BPO/IT sectors include:

• Allocation of Rs 16,800 m in 2008-09 (12% increase from the current year) to the IT and ITeS sector.
• Allocation of Rs 1,000 m to set up the national knowledge network.
• Rs 8,000 m is allocated for developing state-wide area networks (SWAN), state data centers and broadband-enabled common service centers (Rs 750 m for the common service centers, Rs 4500 m for SWAN and Rs 2750 m for the state data centers).
• Customized software to be taxed.
• Customs duty of 12% charged on packaged software.

Disappointment for Many

The industry was eagerly awaiting the announcement of an extension to the tax exemption given to export income under the STPI scheme, which expires on March 31, 2009. Already under tremendous pressure due to the strengthening of rupee and rising wages, the government's silence on the extension of the STPI scheme is ominous. This could result in companies shelling out a huge amount on tax, on average taxes could be higher by 22% in 2009-2010. This will have a significant impact on almost all IT and BPO companies in the immediate future. Over the long term, a few of the large companies may be able to transition to the new SEZ scheme, but this may involve significant investment. However, this option will not be open to small and mid-sized players.

Further, with the increase in excise duty on customized and packaged software, technology adoption in the country will be hit. The imposition of customs duty on packaged software will hurt in adoption of IT in general, but also raise costs for all businesses, and especially IT and BPO companies which are big buyers/users of technology.

Sriram Subramanya, MD, Integra, a publishing BPO says "The budget is disappointing for the Corporate sector as there has been no reduction in corporate tax. All export companies also anticipated some tax concessions because of the rupee appreciation and global recession. It is also disappointing as there was no discussion on the extension of the STPI scheme. This is extremely critical for the IT/ ITES/ BPO industry."

While most vendors expressed their displeasure or disappointment, some others were more positive about the budget. According to Aditya Gupta, President, Infovision, "Overall, this budget has been good for my employees and company. As a company, we did not face any extra burden. It was a neutral budget with no additional taxes or incentives."

Good News for Some…

However, companies offering services to the domestic education and e-learning sector and companies offering data communications services have reason to smile.

The Finance Minister has given special attention to the education sector and has proposed to set up 6,000 model schools, 16 central universities and IITs. If implemented, this will translate into a bigger market for high-end educational products and online learning for companies such as NIIT, Educomp, etc.

In addition to this, the proposal to set up a national knowledge network with 100,000 high-speed kiosks in villages, SWAN and data centers; will result in new contracts for IT companies.

The thrust on educational reforms and focus on establishing rural and state-level broadband connectivity is a positive development. This will benefit the industry in the long term with the availability of a larger and employable talent pool, as well as a broader customer base as IT adoption becomes easier for SMEs and home businesses.

In the short-term, however the budget has not offered any relief to the industry, which is facing tremendous margin pressures. IT and BPO combined is the largest employment generator in the organized private sector of the country, employing close to 2 million skilled people, a figure that has grown at a CAGR of 26% over the last decade, and could continue to grow at similar rates in future. Besides the obvious positive impact on employment, GDP and exports, the industry has helped facilitate the growth of many ancillary industries and has a multiplier effect on consumer spending due to higher disposable incomes amongst its employees.

While the long-term industry fundamentals remain strong, the Budget has not helped in mitigating the current margin pressures. Of course, a commonly held view outside the IT sector feels that software and BPO exporters have been pampered by the STPI tax exemption, and are today strong enough to compete without artificial tax sops. Mr. Chidambaram appears to have bought this argument. But obviously, this view is not shared by the IT and BPO industry!