Undoubtedly, the sops announced on the tax holiday for the next ten yearsfor IT units; relief in ESOP taxation; and concessions to venture capitalfunds would have far-reaching effects on the new economy of India. Afterall, it will be the next ten years that will either make or break the Indianeconomy. And, if we have to build the Indian economy at growth rates ofabout 7-10 per cent per annum, then one sector which comes at the forefrontis the IT sector and that is where Yashwant Sinha has given the much-neededrelief.

By giving a ten-year tax holiday till 2010 to old as well as new IT units,the Finance Minister has removed the class differentiation between the two.Now 2009-10 has been taken as a cut-off year. This means depending upon theyear in which the new unit comes up, it will get the remaining years as atax holiday till 2009-10.

The February announcement-that only units registered till 31 March 2000-willget a tax holiday had resulted in a mad scramble to register units. Manyconsultants made money! And the infotech sector was sort of becoming alicensed sector: companies enjoying a tax holiday and companies not havingit. More than 4,000 units were registered in STP in just one month, whereasonly 1,500 units were registered in the last ten years. We need to thankYashwant Sinha for removing a `default' license raj in the infotechindustry. Now, our youngsters will have bright future as they can competewith existing units on an equal footing.

The announcement by the Finance Minister to extend this tax holiday on agraded scale till 2000-10, should result in proliferation of at least 25,000new units in the next ten years. Based on the Finance Minister's sops,Nasscom has revised its projection for software exports in 2000-01, withprojected exports growth rate in the region of 65-70 per cent instead of theearlier projection of 60 per cent growth. Thus, the IT software and servicesexports are expected to touch US$6.5 billion of Rs 28,000 crore in2000-01.

In yet another move, the Finance Minister has extended the benefits of theten-year tax holiday under Section 10A/10B of the Income Tax Act toIT-enabled services. This means all round proliferation and employmentgeneration in medical transcription, call centres, data processing, etc. Asper the NASSCOM-McKinsey Study Report 1999, IT-enabled services are expectedto generate revenues of $17 billion by 2008 and provide jobs to about 1.1million people in the country.

Availability of a large pool of skilled knowledge workers is one of India'smajor advantage in the infotech sector. Companies in the infotech sector have been increasingly using ESOPs (Employee Stock Option Plan) to retainmanpower, decrease brain-drain and create wealth for individuals. Till now,ESOPs issued by companies in India was taxed twice, once as a perquisite atthe time of exercise of option, and second as a capital gain and that alsoat the time of sale.

As per the new announcement, ESOP will be taxed only as capital gain at thetime of sale. Now, the employees will not be forced to sell away their stockoption just to pay tax. One shall pay tax but only when one gets cash, andnot on the notional value! Given the meltdown at the BSE and NSE, the ESOPswere loosing their attraction. This announcement will once again make ESOPsattractive.

For the Internet and the dot.com sector, one major source of financing isventure capital. The Finance Minister had announced major concessions forventure capital funds in the Budget Proposals 2000-01. However, thefineprint of the budget had led to various anomalies including taxation ondistributed and undistributed profits.

The new announcements have implemented a complete "pass-through" for venturecapital funds in India. Now, venture capital funds will not have to pay tax,but the tax will be paid by the investor. Thus, the differentiation betweenoverseas and domestic venture capital funds has been totally removed,otherwise here too all foreign venture capital funds would have come throughthe Mauritius route. The industry expects at least US$3 billion of venturecapital money to flow into India in next 18-24 months.

Undoubtedly, with these announcements, Sinha will be always remembered asthe person who laid the foundation of the new economy in India. It is S forSinha; S for software and S for superpower. Also, Pramod Mahajan, Ministerof Information Technology and Parliamentary Affairs has emerged as a strongally of the infotech industry. He has shut up the critics who were doubtingthe need to have an Infotech Ministry.

The Infotech Ministry has helped to convert red tape into a red carpet. Now,with major problems solved - the time is to work together to build the NewEconomy and generate $ 50 billion of software export by 2008. The only otherproblem to be solved is to create state-of-the-art infrastructure andtelecom bandwidth bottlenecks.

-- DEWANG MEHTA, President, Nasscom