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Withdrawal of tax benefits will have an adverse impact
March, 06th 2007

The Budget appears more pro promoter than pro employee and is inexplicably and unnecessarily harsh on the Aam Aadmis (employees) who are the real drivers of our success story today. The proposed tax provision on ESOPs, completely at variance with international practice, will effectively kill this value creation avenue for millions of employees.

The service tax on property leases will only impact SMEs, making them uncompetitive, as larger companies can afford property acquisition. MAT on export incomes, exempt under Sections 10A and 10B, is a regressive step that withdraws governments commitment to provide tax incentives till 2009. It will affect investor confidence and growth in this sector.

In fact, the industry had expected the reverse, i.e., an extension of benefits under the STPI scheme by 10 years so that SMEs could avail of the same tax benefit that larger IT companies will get under the SEZ scheme.

Venture capital, the life blood for knowledge industries and the only source of capital for SMEs, will be severely impacted by the inexplicable and totally unnecessary selectivity in allowing venture funds tax pass through status. Firstly, the view that tax pass through to a venture fund is a benefit is erroneous as the income is taxed in the hands of the investors, only double taxation is avoided. Worldwide, tax pass throughs are routinely accorded to venture funds and any association of persons involved in investing. It is presumptuous for government to be the clairvoyant and choose six areas. The Budgets notable exclusions are some of the fastest growing and innovation driven areas such as KPO/BPO, telecom, wireless value added services, media and entertainment, etc. Just as happened in software (which would surely not have been on the governments chosen list 20 years ago), these are the areas where potential Indian world beating companies will emerge, if they get venture capital.

The measures come at a really bad time as the industry is under significant pressure. With US elections underway, the rhetoric and anti outsourcing sentiment towards India is already intensifying. Competitors such as China, Philippines, etc. are upping the ante, making massive investments and offering a plethora of benefits, including tax. And talent scarcity is driving up wages, impacting competitiveness. More than ever, before the industry needs all the help that it can get to achieve its full potential and make a vital difference to Indias destiny. The above Budget proposals will have a dramatically adverse impact on Indias most successful industry, killing the goose that is laying the golden eggs. Ironically, all this will add minimally to tax collections. SMEs, which will be most impacted, constitute over 90% of the industrys players but a minor portion of its profits and BPOs, the most acutely hit, are the least profitable. And the changed VC norms will only impact domestic VC funds, which account for barely 5% of VC/PE, in India though they constitute a majority of genuine seed stage investment.

-The writer is past chairman, Nasscom

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