Industry circles have been abuzz with rumour that withdrawal of Section 80 HHE facility to infotech companies will create havoc with their earnings. Exports form over 90 per cent of the earnings of several major companies such as Infosys whose stocks had taken a hammering on the Bombay Stock Exchange on Monday.

Removal of the said section would have a disastrous effect on the stock exchange, fears Nasscom. The Sensex, in the last few months, has mainly maintained a stable level due to high growth in software scrips.

"Withdrawal of the section can be disastrous to software exports. There is definitely a direct co-relation between incentives and export growth. Moreover, it should not be viewed by the finance ministry as an incentive, but as a facilitator," Nasscom president Dewang Mehta has stated 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 the industry still does not get adequate funds from banks, who mainly believe in asset-based financing.

"At a time when the local software industry is fighting a tough battle of non-tariff trade barriers being imposed by the US and EU nations, withdrawal of the benefit will be totally disastrous. In other words, it would send a signal that while the industry is fighting the battle overseas, our own Government is not supporting the industry," according to the memorandum.

"If the withdrawal of the section is being done under pressure from WTO, then we should fight our battles stronger because other countries at WTO are being very unfair to 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.

NIIT vice-president and managing director Rajendra S Pawar called the step "very retrograde". "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 comes from 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 the section 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. A Pentafour board member, however, sought to underplay the whole controversy, "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 the section, 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 the section 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 is getting 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.

A section of information-technology companies in Bangalore has said that the Government's proposed move to impose a minimum alternate tax (MAT) on such companies will have telling impact on their bottom line.

A senior official with the Bangalore-based BFL Software Ltd said: "This is not the right time to levy such taxes. All the major industries are going through a bad phase and infotech industry is the only exemption,'' he said.

BFL Software assistant vice president (international) R Mohan said the company is yet to get any correct information on this. It is not clear whether the Government will impose a minimum alternate tax on the company's export revenues or income from off-shore or onsite developments.

"If the tax is slapped on income from off-shore business of our company, there is unlikely to be any impact on BFL Software's net profit. But the proposed tax system will have a negative impact on all industries in the country. However, we cannot quantify the damage to the industry," he said.

"In fact, the Government should encourage the information technology industry by offering additional incentives to the multinationals which were trying to set up their shops in India," Genisys Integrating Systems director PVKN Lingaraj Urs said.

The Government should collect direct tax in a proper manner in order to meet its requirements. "However, we do not foresee any change in investment plans of the infotech companies in the country. The ongoing expansion will not be hampered with the proposed tax. But the bottomline will take a beating with this kind of tax structure. However, it is still unclear about what kind of tax the government is planning to impose," he added. Datacons spokesperson Jyothi Shankar said the move should be scrapped and the domestic software companies should be given more sops to grow in India and explore more overseas markets.

Technopark-Kerala chief executive officer KG Satheesh Kumar said that "the main sufferers will be the new entrepreneurs in this industry."