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'We could still have extended exemption on taxes on the IT industry for another couple of years'

BUDGET 2000

N Venkaswamy

I think it is a pretty average Budget that does not addresses major issues relating to raising revenue or focussing on the growth of the economy other than that of the IT sector. I expected some clarity on the tax treatment of employees stock option shares, which has been left untouched. The current mode of taxing ESOPs at the time of issue is not only unfair but a deterrent for the employee. Thus it simply defeats the purpose for which ESOPs were created.

The pluses that I see relate to the rationalisation of excise duties and, to an extent, the focus on the agricultural sector. I certainly welcome the reduction in duties on computer hardware, which I think will go a long way to proliferate the usage of computers.

The minuses, to my mind, relate to the complete absence of any clarity on ESOPs. I expected the government to announce that ESOPs would be taxed at the point of sale, either at the normal rate or at a capital gains tax rate. This has not happened. Further, for small and medium software companies, the introduction of duty on export earnings is a retrograde step.

I agree that taxes on export earnings could have been deferred for another year, especially since the industry still has a large number of very small companies -- there are hardly 20 companies worth more than Rs 1 billion in revenue in the IT industry!

In the short run, the impact will not be much, since software companies already pay taxes in the countries where they operate. Companies will now set this off against taxes in India. But taxes on earnings from offshore work will be significantly affected.

Income tax on export earnings has been introduced in a phased manner since the government believes that the IT industry is maturing and that they should now be brought under the tax net. While, in principle, I agree that any organisation making profits should pay tax we could still have extended the exemption for another couple of years since there are a large number of very small companies in the industry that could use this money for further investment.

N Venkaswamy is managing director, PSI Data Systems.

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