Come February, we all are eagerly waiting for UNION BUDGET to be presented, that is surely going to make a noticeable impact in every Indian man's life. Every individual at home or abroad having something to do with Indian economy is waiting for the 'THE DAY' to come.

Finally the day has come as our honorable Finance Minister, Shri P.Chidambaram (Mr. PC, in short) moves swiftly in his official car, holding a trendy briefcase to unreel the climax.

Thanks to the technological advancements in broadcasting networks, the budget soon reached every threshold without much of a delay or waiting. Various News channels started analyzing the impact of budget in all spheres possible. I am sure; there is something to feel good about, despite all sorts of reactions from corporate gurus, there is festivity all around. Yes, I am talking about that 'Universal Topic of Discussion'.

This even made me glued to the idiot box too. Software being my area of interest, I gathered quite a few reactions from IT giants. It gave me an idea of summing up those reactions.

Here it goes:

Before we try and find out the reactions of people in the IT industry, let me give you the IT sector outlook in brief.

 Sector Outlook:

The Indian IT Services market has witnessed strong growth over past few years, due to increased offshore outsourcing initiatives from global corporations. More and more global corporations are trying to improve their cost efficiency and, thus, outsourcing their technology requirements to low-cost countries like India. In fact, it is the offshore component that has been seeing impressive traction, driven by increasing acceptance of the 'global delivery model'. The demand now seems to be shifting from low-end services to high-end ones, like IT consulting, package implementation and systems integration.

Excerpts from Union Budget '07:

Mr. PC elaborating the Tax proposals at the country's disposal in his speech says 'MAT should therefore apply, as far as possible, to all corporate incomes. Hence, I propose to extend MAT to income in respect of which deduction is claimed under sections 10A and 10B of the Income tax Act .…' .

And also 'I propose to bring ESOPs under FBT. The value of the fringe benefit will be determined, in accordance …..'.

…………..  and so on.

Watching all this, my 9 year old son suddenly got into action .He had series of questions to put. I am very thrilled to see his curiosity to ask on an issue like Budget. So he was allowed to ask. He asked 'What is this MAT all about. This has something to do with the magic MAT?' in his own innocent voice. Yes, he is referring to the story 'Aladdin and the Magic Lamp'.

He continues 'Is ESOP & FBT some new pokemons? I haven't heard these  names? Wait! Let me log on to internet and check…'. Thanks to the technology again.

I tried to convince him, how important this jargon is to me at this moment.

I tried to put it this way. MAT is nothing but 'Minimum Alternate Tax'-It Is the tax that has to be paid by the companies that are enjoying tax benefits or tax exemption under various schemes.

'What about ESOPs and FBTs? Are they not pokemons?' Said my son.

ESOP is an Employee Stock Ownership Plan is a way in which employees of a company can own a share of the company they work for.

FBT is 'Fringe Benefit Tax' - It is the tax levied on benefits provided by an employer to his employees, in addition to the cash salary or wages paid.

He seemed to have got this, but little disinterested he was. But more questions arose in his mind. "Why tax in the very first place!!! Who pays tax!!! And so on…."

OK ! let me proceed with our main issue.

Budget measures pertaining to software industry could be summarized as follows:

MAT would be applicable on IT companies.

FBT would be levied on ESOPs.Increased allocation to Rs 7.2 bn as against Rs 3.9 bn in the previous year for ambitious e-governance project.A new scheme of manpower development for the software exports industry has been launched with an allocation of    Rs 330m.Benefits of investment in VCF have been extended to Information Technology sector, by giving a pass-through status to the same.

After a little while, my son again came into action. He came and saw me doing some work on my laptop. Again his agile mind came up with a question. Rather some interpretation, this time.He says, VCF, I am sure it is 'Vintage Computer Festival' .He could relate his mom more with computer terminology.

For this time, I took a halt for a while and I thought in my mind, how to convince him about my new interest.I said, 'My son! VCF is not 'Vintage Computer Festival' but it has to do some thing with money. In full you can say; 'Venture Capital Fund'. I couldn't stop there without elaborating. I said 'Venture Capital Fund' is venturing into  a partnership  wherein a  third-party investor is involved.Broking House, ASK-Raymond James & Associates has come out with a report on Budget impact on various sectors.

According to ASK-Raymond report: (source www.MoneyControl.com) the Overall Impact is Negative for IT sector.

The implementation of MAT needs more clarity. The effect will vary from company to company. However, Infosys has gone on air citing a negative impact of about 1.5% on net margins.

Given the supply constrained scenario, it is negative for companies. However, most large companies have stopped giving additional ESOPs and are only giving stock on exercise of options given previously.

Positive for companies like Educomp Solutions and NIIT Ltd.

Positive for companies involved in the e-Governance and defense space (due to the offset clause) like CMC, TCS, etc.

Few Neutral Reactions:

"With respect to MAT, though there is an increase in coverage of MAT for 10A/10B companies, there is the facility of carry forward of MAT which is available to all companies. So in effect we will not have much impact on profits." -- Mr.Amar Chintopanth, Executive Director and CFO, 3i InfoTech.

Market reaction:

"We are dismayed at the proposal to extend MAT on export incomes which are exempt under Sections 10A and 10B. This is a regressive step that withdraws government's commitment to provide tax incentives till 2009, on the basis of which companies have made their business plans and investment decisions. This could affect investor confidence and growth in this sector." -- Mr. Kiran Karnik, President, Nasscom.

Information Technology stocks, including that of giants like Infosys, TCS and Wipro , were the most deserted counters on the Dalal Street a day after 'The Day', after the Union Budget proposed measures that will increase the tax burden on software companies.

 The index plunged to close at a low of 4,869.99 points, 302.41 points down from the previous close of 5,172.40, after Finance Minister P Chidambaram announced proposals like bringing ESOPs under FBT regime, imposing Minimum Alternate Tax on companies and increasing dividend distribution tax.

Summary:

Overall, we can say that this year budget had got mixed reactions from various corporate heads. Inclusion of IT industry under MAT had a great opposition. Bringing ESOPs under FBT regime had also drew great opposition from IT sector.

 Ask-RJ report revealed that implementation of MAT needs greater clarity. It is positive impact on IT companies involved in education and e-Governance projects.

 There is no change in the IT hardware industry, so prices remain the same. ALAS…. There is a reason to feel happy about with the budget as far as a layman is concerned. This gave me a wonderful experience . As, the whole exercise made my son learn that Budget has something to do with money. After-all, he too realized the importance of  'THE DAY'.

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