The chips are down

BUDGET & BUSINESS

INFORMATION TECHNOLOGY: The higher excise duty on packaged software and service tax on customised software is a setback.

The measures
The IT sector got off to a good start with increased allocation of funds to the Department of Information and Technology (DIT). It has been raised from Rs 1,500 crore in 2007-08 to Rs 1,680 crore for 2008-09.

Other proposals from the finance ministry include zero excise duty for wireless data cards used for internet connectivity, a full exemption for specified parts of set top boxes (STBs), specified raw materials from customs duty for use in the IT/electronic hardware industry and reduction of customs duty on convergence products from 10 per cent to 5 per cent.

Around Rs 450 crore has been allocated for state wide area networks (SWAN), Rs 275 crore for state data centres and Rs 75 crore for common service centres (CSCs).

Besides, one lakh broadband internet-enabled CSCs will be established. The DIT has been allotted an additional Rs 100 crore for establishing the National Knowledge Network.

The minister has proposed a non-profit corporation, with the government putting in Rs 1,000 crore as equity. However, excise duty on packaged software has been increased from 8 per cent to 12 per cent.

The context
The FM has chosen to completely ignore the demand to extend the tax holiday for software technology parks of India, which comes to an end in March 31, 2009.

This incentive provides tax benefits under Section 10A/10B of the I-T Act. Increasing the excise duty on packaged software to 12 per cent was done to bring it on par with customised software, which will attract a similar rate of service tax.

Similarly, reducing excise duty on certain goods was to establish parity between devices used in the information/communication sectors and the entertainment sector.

The impact
The higher excise duty on packaged software and service tax on customised software is a setback. "This will impact the domestic industry and to some extent discourage domestic companies who are into customised software," said i-flex Solutions Vice Chairman Deepak Ghaisa.

Sify Executive Vice President Naresh Ajwani said, "The stress on data centres and nil duty for STBs is certainly big news."

But according to TataSky MD and CEO V Kaushik, "There will be no change because the reduction is negligible. Therefore, prices on STBs will not come down. We are disappointed that the Budget has not considered reduction on excise duty."