Boom ends? — Nasscom scales down software export target

US brokerage firm Credit Suisse First Boston (CSFB) recently downgraded the Indian IT services sector from `outperform’ to ‘neutral’, knocking a solid 8 per cent off the Bombay Stock Exchange’s IT index. The CSFB report said that the Indian IT companies would continue to grow healthily, but would fall short of the market’s expectation of an average 70 per cent earnings growth in the current fiscal and beyond.

"The Indian IT sector’s ability to outperform is severely restricted due tothe slowing US economy. They will still be worse off than their earlier position of revenue growth, being constrained on the supply side andcompanies enjoying great pricing power," says the report.

The downgrade, which came as a rude shock to the markets, is likely to bring the valuation of IT stocks’ valuations down to the ground from the stratosphere. Even after the recent setbacks, the current valuations ofIndian IT companies factor in 8-12 years of strong revenue and cash flowgrowths.

Mehta said that the software export figures for 2001-02 would be $9.5 billion. He also sought to allay fears that the US slowdown would adversely affect the Indian software exports, saying, "on the contrary there is an acceleration of outsourcing software requirements from India." He said the Indian software industry’s exposure to North American market was currently 60 per cent, with upto 24 per cent of software exports being targeted at European countries.

Nasscom today demanded a five-year moratorium on taxation of E-commerce transactions and asked for changes in Income Tax Act to boost the infotech market in the country. In a ten-point budget proposal to Finance Minister Yashwant Sinha, Nasscom president Dewang Mehta said "we are seeking a minimum five-year moratorium on taxation of E-commerce transactions."

The software association has also sought clarification that onsite services are recognised as a part of computer software exports under Section 10 A/10 B of Income Tax Act which deals with tax holiday for units under export oriented units (EoUs), Export processing zones (EPZs) and software technology Parks (STPs).

Mehta said "these sections have very narrow definitions of computer software, thereby not exempting onsite services exports from income tax".Currently, almost 60 per cent of India’s exports are through onsite services and the service is expected to account for $3.7 billion out of the total $ 6.2 billion of software exports estimated for 2000-01.

Mehta said section 10 A/ 10 B of the I-T Act relating to change in ownership and tax treatment thereafter, was acting as a deterrent to mergers and acquisitions of software companies. As per the provision of the section if during the year more than 51 per cent of shareholding ownership changes in 100 per cent EOUs, STPs and EPZs, the company would cease to get tax exemption.

Nasscom has further demanded that the software units in backward areas should be allowed to get tax holiday like manufacturing units under the Income Tax Act. "This would help and proliferate setting up of software units in Goa, Madhya Pradesh, North-East as also new states of Uttaranchal, Jharkhand, Chattisgarh and many backward areas of other states," Mehta said.

The association said the dividends from overseas subsidiary companies of IT software and service units should be tax exempted and added that software services should continue to remain outside the purview of service tax. Nasscom further said that no import duties, excise and sales tax should be levied on computers sold to schools as recommended by National IT task force.

The proposal also includes a demand for allocation of Rs 1,500 crore for upgrading regional engineering colleges (RECs) and IITs during 2001-02 adding that Rs 10,000 crore would be required for human resources upgradation during the Tenth Plan. Mehta further said physical and telecom infrastruture should be strengthened in major software cities in India to ensure proliferation of IT in the country.