Software companies against removal of tax sops

Removal of Section 80 HHE would have a disastrous effect on the Indian stock exchange, fears Nasscom. The sensex in the last few months has mainly maintained a stable level due to high growth in software scrips. Reduction and fall in software scrips will, therefore, cause a major debacle at Indian stock exchanges, Nasscom has pointed out in its memorandum.

Introduced in 1991, Section 80 HHE relates toincome tax exemption to profits derived from software exports. At present, these earnings are exempt from IT and software exports have recorded an annual growth of 50 per cent.

“Withdrawal of Section 80 HHE can be disastrous to software exports from the country. There is definitely a direct co-relation between the incentives and software exports growth. Moreover, it should not be viewed by Finance Ministry as an incentive, but as a facilitator,” Nasscom president Dewang Mehta has said in the memorandum.

The real benefit of Section 80 HHE is that it allows software companies to replough their profits for further growth. It is very essential as otherwise software industry still does not get adequate funds from banks, who mainly believe in asset based financing.

“At a time when the Indian software industry is fighting a tough battle of non-tariff trade barriers being imposed by the US and EU nations, withdrawal of Section 80 HHE will be totally disastrous. In other words, it would send a signal thatwhile the industry is fighting the battle overseas, our own government is not supporting the industry,” according to the memorandum.

“If the withdrawal of Section 80 HHE is being done under pressure from WTO, then we should fight our battles stronger because other countries at WTO are being very unfair to Indian software industry on the issue of non-tariff trade barriers and movement of natural persons,” he added.

“Because of Section 80 HHE7, the industry has been able to create a business model in last seven years. Any tampering of this model would completely imbalance the industry,” according to the memorandum.

When contacted, NIIT vice-president and managing director Rajendra S Pawar said if this does happen, it will be a very retrograde step. “This is the only sector which has done so well. There are so many companies whose future bank on software exports, many more are entering. Such a move will affect the business climate for the sector,” he added.

Over 50 per cent of NIIT’s revenue comesfrom exports. The company is fifth among the top export earners among IT companies and its export revenue stood at Rs 258.38 crore in 1997-98.

It will be the top software companies which will be particularly hit if the withdrawal of Section 80 HHE is notified as is being feared by the industry. More than 50 per cent of the total export revenue of Rs 6,530 crore was earned by the top 10 companies.

The top earner is Tata Consultancy Services which had a revenue of Rs 955 crore in the last fiscal year, followed by Wipro with a revenue of rs 389 crore. HCL Consulting, Pentafour Software and Exports were at third and fourth number with earnings of Rs 345 crore and Rs 271.75 crore respectively.

A Pentafour board member, however, sought to underplay the whole controversy, when contacted. “I am certain this is nothing more than a stock market scare as some bulls want to stock the software scrips before the budget,” he said. The company has registered a 45 per cent growth in its export revenues.

However,when asked to comment on the impact of withdrawal of Section 80 HHE, he said: “If it is taken away, it will definitely affect. I do not think the government will make the mistake of killing the goose that lays golden eggs. If it does happen, we will be forced to shift our operations outside the country.”

In 1998-99, software exports are expected to fetch Rs 11,000 crore. As per Nasscom figures, up to the third quarter ended December, the total stood at Rs 7,700, but close to 35 per cent of the total annual exports take place in Q4.

The industry has achieved a growth of 68 per cent since last year in rupee terms and 52 per cent in dollar terms. Withdrawal of Section 80 HHE could mean that the growth rate may fall by as much as 50 per cent, Mehta said.

“Withdrawal of these incentives would be a death knell to this industry. Moreover, it should be remembered that while the industry is enjoying income tax benefits. the professionals who work in this industry pay income tax. Therefore, the government isgetting its due,” Nasscom has claimed in the memorandum.

Commenting on the issue, a senior task force member said that if such incentives are withdrawn, then we should forget about becoming a software superpower or achieving the target of $50 billion worth of software exports set by the national IT task force. This withdrawal will undo many a positive steps taken by the task force, he felt.