Budget 2013 Supports Startups, but WHT Rate Increase is Worrisome: Analysts

CIO February 28, 2013
Budget 2013 Supports Startups, but WHT Rate Increase is Worrisome: Analysts
Indian Analysts react to the Union Budget 2013.

Here are some initial reactions from noted Indian analysts in the IT industry:

Praveen Bhadada, Director-Market Expansion, Zinnov:

Thumbs up for Startups: The Union budget 2013 is indeed quite promising on a number of things. It’s good to notice that the government has finally realized the importance of Technology Incubators, and linking this to the CSR budget is a welcome move. We surely foresee this to improve the positioning of India as a nation of start-ups.

Initiatives for Small Businesses and Innovation: It is also good to see the government’s focus on innovation. Setting up a Rs 200 crore fund for fuelling local innovations is great news that will encourage the innovation ecosystem in the country. Additionally, the budget also brings in lot of positive initiatives for the important MSME sector with announcements on listing on MSME exchange (without IPO), non-tax benefits and no tax for MSMEs that move to large enterprise class. These are significant incentives for MSMEs to invest in growth and become globally competitive.

Clarity needed for Tax on R&D firms: The grave issues of lack of clarity on tax for R&D and IT companies in India, and lack of specific focus on domestic and exports market for IT companies still remain untouched. Along with increased cost of mobile phones and heavier import duties on Set-Top-Boxes, this has brought in some disappointment to the industry. It would have been good to see clear directions on making India a global business-friendly economy.

Partha Iyengar, Country Manager -Research, India:

The FM's big, overarching focus on growth is the fundamental ‘feel-good’ factor in this budget. Given the fact that one can argue that a lot of the weakness in the Indian economy is what I call a ‘sentimental recession’, his strong statement that there is no grounds for ‘doom and gloom’ heading into the new year is a bit assuring. One of the big specific positives of the budget is that he has focused both in terms of the letter and spirit of the budget on the key planks of growth for India and health of every industry for the growth of domestic manufacturing. Some of the other positive areas are support for entrepreneurship and the MSME sector, both in terms of financial and overall support. The recognition that the overseas ‘trust deficit’ in terms of a comfort level on India’s investment climate has to be addressed is also welcome.

However, the budget is only a directional statement, and the challenge for India historically and even currently is in the execution of the statement of intent outlined in the budget. This has been India’s Achilles’ Heel, in that bold pronouncements in the budget never see the light of day or are not implemented as effectively as they can or should be. So it was disappointing to not see any statements on what the government would do to ensure mechanisms/oversight to ensure speedy and efficient implementation of these programs.

Overall, a 7/10 score for the budget.

Dinesh Thakkar, Chairman & Managing Director , Angel Broking:

The Union Budget 2013-14 was a non-event for the IT sector. Apart from measures related to investments in improving the quality of education, the budget did not outline any impact on the sector. IT-Education companies are expected to benefit from the increased allocation of funds for education - a total of Rs 65,867 crore, up 17 percent from last year, as it will boost business opportunities in ICT and vocational segments. The plan allocation for elementary education under the Sarva Shiksha Abhiyan increased to Rs 27,258 crore from Rs 25,555 crore last year. This move is positive for companies such as NIIT, Educomp, Everonn and others.

Pradeep Udhas, Partner  & Head of IT/ITES, KPMG India:

“Budget 2013 has been disappointing for the IT-BPO sector. The main issues raised by the industry like rollback of taxation on software treated as royalty, removal of the minimal contiguous land requirement for SEZs, dual levy of VAT and service tax on domestic software sales, and more clarity on transfer pricing norms for the sector have been left unaddressed. One hopes that the finance minister will keep his promise of releasing the findings of the Rangachary committee by end of March 2013. The increase in WHT rate to 25 percent on royalty and technical service fee payments is also going to impact the industry on international payments to non-tax treaty countries.

However, there are a few things to cheer about. The increase in spending on the education sector is a welcome move and a good news for software vendors focused on digital learning, as well as PC manufacturers looking to boost laptop and tablet sales. Moreover, the government is promoting the semiconductor industry in the country by providing zero customs duty on plants and machinery. The government has also announced a major IT-driven initiative to modernize the postal network, something that will attract IT service providers.”

Naveen Aggarwal, Partner (Tax), KPMG in India:

“Non-issuance of service tax refunds is an administration matter outside the Budget. I would not include that, but rather talk about dual levy of VAT and service tax on domestic software sales which has been left unaddressed. The increase in WHT rate to 25 percent on royalty and technical service fee payments is also going to impact the industry on international payments to non-tax treaty countries.”

R. Raghuttama Rao, MD, ICRA Management Consulting Services (IMaCS):

The two biggest positives of the budget: (a) concerns on fiscal deficit have been squarely addressed by limiting it to 5.2 percent in FY13 and to 4.8 percent next year, and (b) resisting the pressures of an oncoming election to announcing any freebies that could skew government finances. 

Concerns on fiscal deficit that remain: The reduction in FY14 assumes an increase in growth rate of GDP that is not manifest, and the proportion of revenue deficit remains high. On the shortcomings side, the budget has not done enough to spur investments or accelerate growth. The investment allowance on manufacturing sector investments is welcome, but not enough. More tax incentives for a one year period should have been extended to attract investments.

The budget has done less than what was possible on stemming the CAD, particularly in weaning households away from consuming gold or in stimulating exports. On the whole, the budget is positive to the challenges that the economy faces, although less has been done vis-a-vis the possibilities to stimulate growth.