Surprising really, for a market that's been riding high on IT stocks in the more recent days, considering that the IT sector has seen several sops in the budget proposals.

Yes, the budget includes the proposal that tax exemptions on export earnings be phased out in five years, by being reduced by 20 per cent every year.

Some market analysts feel that the stock market was running on too much hype and so this proposal on scrapping tax exemptions on export earnings, alongwith the proposed increase in tax on dividends on companies from 10 per cent to 20 per cent, may have been a show of initial disappointment.

But some analysts feel that the dip would probably have been caused by the smaller, short-term investors pulling out, doubtful, but that on the whole, the market will continue to remain buoyant, because of the liberalisation on venture capital investment and of the FII ceiling on investment.

The good news for the IT industry has come in the form of a number of import sops on hardware, both in the computers as well as the cellular telephony segments. These include reduction in customs duty for computer motherboards from 20 to 15 per cent; floppy diskettes, from 20 to 15 per cent; specified capital goods for manufacture of semiconductors and integrated circuits from 15 to five per cent; microprocessor for computers from five per cent to zero; CD-ROMs from five per cent to zero; integrated circuits and micro-assemblies from five per cent to zero; and data graphic display tubes for colour monitors for computers from five per cent to zero.

"The extension of special additional duty, or SAD, on traded goods offsets the reduction in duties, and there is not much change expected in these prices. However, the budget will provide an advantage to those assembling and manufacturing systems within the country. The reduction of duties on processors, memories, CD ROM and some other components to zero will facilitate the setting up of vendor hubs within the country, and this will provide flexibility, reduced time-to-market as well as inventory reduction. The duty reductions themselves will result in an estimated three-to-four per cent decrease in prices to the end-user," Balu Doraisamy, managing director, Compaq India, says. Reactions from Pune

In the cellular phones segment, duty on battery backs for cellular phones is proposed to be reduced from 40 to 15 per cent. Excise duty on cellular phones is to be reduced from 25 per cent to five per cent.

The basic customs duty on specified raw material for manufacturing optical fibres has been reduced from 15 to five per cent and the concessional five per cent basic duty applicable to specified telecom equipment has also been extended to Internet service providers.

More good news comes in the form of the proposed liberalisation of the tax treatment for venture capital funds. No approval by tax authorities will be required for venture capital funds. Only a one-time tax of 20 per cent will be applicable when the capital is distributed to investors. In addition, FII
limit (in terms of equity shares) is being raised from 30 per cent to 40 per cent.

The Securities and Exchange Board of India will be the single nodal agency for the registration and regulation of both domestic and overseas venture capital funds. These measures are intended to give a major boost to NRIs in the Silicon Valley and elsewhere to invest some of their enterprise in
India.

Another major proposal is in the liberalising of the policy for acquisition of companies abroad, to enable Indian corporates in knowledge-based sectors to grow rapidly. The ceiling on acquisition investment abroad, therefore, will be increased from $15 million to $50 million for automatic approvals, and beyond this, through approval by the Committee on Overseas Investment.

Clearly, the intent is to help the domestic knowledge management industry to build on the momentum it has already picked up.

Yashwant Sinha's argument is that the software industry is already doing well; it is now time to boost the hardware industry to bring it up to the software industry's levels.

The duty structure on hardware has been reduced in line with the WTO phase-out regime of 2003 as per the recommendations of a national task force. The government's attempt will be to up the hardware sector's current export target of $10 billion by 2010, as opposed to the software sector's $50 billion.

The tax holiday on industrial units in backward areas being extended by another two years could also be seen as an advantage even for the IT sector.

Sanjay Shetty, CEO of DBS Internet, is overall positive about the proposals for the IT industry. "The sops on venture capital and lowering of import duties on hardware, will allow the industry to take the best that is available globally. By boosting hardware inputs, after all, the government will aid the software industry. And with IT start-ups happening all across India,
export is bound to increase down the line."

There is some disappointment in the IT industry on the complete ignoring of the industry's suggestion on debonding, wherein if you want to export a little more than what is fixed for bonding at customs, you could do it without too much hassle. Plus, some expression of disappointment has come
from the larger IT companies that the ceiling on investment abroad has not been raised to much more.

While the larger companies do not seem to be very disturbed by the imposition of tax on export earnings, smaller start-up companies are not very sure how to react.

Doraisamy is positive on the whole when he says, "While Budget 2000 is not a breakthrough one for the IT industry, it has a number of remarkable and encouraging points.  The opening up of Venture Capital and FII investment will result in investment in the IT segment, which will not only create jobs, but also spur technology sales. The budget provides incentives for local manufacture, and this is good news."

Plus, However, the budget will provide an advantage to those assembling and manufacturing systems within the country.

The reduction of duties on processors, memories, CD ROM and some other components to zero will facilitate the setting up of vendor hubs within the country, and this will provide flexibility, reduced time-to-market as well as inventory reduction. The duty reductions themselves will result in an estimated three-to-four per cent decrease in prices to the end-user.

Overall, the software industry has reached a stable level of development and global exposure.

Compared to other industries in India, it has been booming in the recent times and is expected to continue to boom into the future. To that extent, Budget 2000 may not cause more than a mild hiccup to its growth, even in the mid-term. Perhaps it's more a question of this industry working out its balances in relation to the budget and then moving on at, very hopefully, an accelerated pace. Worldwide, after all, software exports
are subject to tax.