Stimulus Package Could Benefit India Inc.

by Abhinna Shreshtha & Manu Sharma    Feb 25, 2009

The Lok Sabha yesterday approved External Affairs Minister Pranab Mukherjee’s plan for reducing the CENVAT (excise duty/CVD) rate by 2% and service tax by 2.5%. Mukherjee had proposed these steps in the VOA announced earlier this month.

Industry bodies like MAIT, CII, FICCI, etc. have welcomed the move, which it sees as a positive move by the government to lift the economy.

How does the reduction in CENVAT rates and service tax help Indian manufacturers? For one, it is expected to bring some degree of price stability. Reduction in service tax could also see a reduction in prices of IT solutions and services. Vinnie Mehta, executive director of MAIT, opined that the reduction in excise and service tax would help bring down the prices of IT products other than computers. Of course, as K. Vaitheeswaran, co-founder of Indiaplaza.in, points out, whether price of IT products and services actually comes down will depend on the manufacturer and if he is willing to pass on the benefit to the consumer. 

Hiranya Ashar, CFO of Rolta India, a developer of IT-based GIS and engineering design services, however does not expect any major impact on Indian IT companies. "More than 90% of their (IT companies) revenues are exports and exempt from these taxes. There might be minor gains in terms of reduction in cost for items which attract service tax such as lease of premises, telecom expenses etc," he said.

Harinder Salwan, secretary of Infotech Software Dealers Association (ISODA), also echoed this view. According to him, the confusion over interpretation of applicability of service tax on packaged software still continues. He further said that telecom users will be the biggest beneficiaries of this announcement as their phone bills will be reduced by 2% across the board.

Chandrajit Banerjee, director general of the Confederation of Indian Industry (CII) said, "The announcement would stimulate demand. The further reductions in excise, service tax by 2% and extension of reduction in excise duty will go a long way in stimulating consumption."
 
As Sudhindra Mokhasi, founder & CEO of BPO e-Sutra, points out - the IT industry is on the cusp of transition from STPI and SEZ, hence the proposal to bring on par the IT exemption for separate entities and subsidiaries in an SEZ is a good move. (However this will be brought into effect only after the formal budget).

In today’s scenario, most companies are looking to either defer annual increments or give nominal increases. Overall easing of tax rates can be viewed as higher effective net income for employees and hence the reduced annual increments may look more palatable and acceptable to employees.