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Karnataka imposes 4% tax on software sector

Fakir Chand in Bangalore

After dilly-dallying during the first two years of office over taxing the mighty software sector in the state, Karnataka Chief Minister S M Krishna finally decided to levy 4 per cent tax on computer software from the next fiscal.

Terming it as rationalisation of commercial taxes, Krishna announced in the legislative assembly in Bangalore on Thursday that the state government would be re-introducing 4 per cent tax on computer software.

Presenting his third Budget in a row by virtue of holding the finance portfolio as well, Krishna appears to have been emboldened by Union Finance Minister Yashwant Sinha's initiative to levy a 10 per cent tax on software exports in the Union Budget 2002-03.

Though such an attempt was made by the chief minister for the fiscal 2000-01, he had to roll back hastily under pressure from the IT lobby, spearheaded by the likes of Narayana Murthy of Infosys and Azim Premji of Wipro.

Incidentally, Karnataka is the largest exporter of computer software with a whopping 40 per cent share of India's total exports. In the nine-month period of the current fiscal ending December 31, 2001, exports from Bangalore alone went up by 48 per cent over the last year to cross Rs 66-billion mark.

As many as 80 IT companies came calling to set up their facilities in the Silicon Valley of India, including about 40 from foreign countries, bringing an investment of Rs 3.55 billion, half of which came from overseas.

It remains to be seen how a recession-hit software industry, especially the small and medium enterprises takes this additional burden in its stride though the big players can afford bear it.

Krishna, however, went soft on the hardware sector, reducing tax to 4 per cent from 10 per cent on some of the IT products and electronic goods such as electronic diaries, parts and accessories; DC micro-motors up to 37.5 watts; electrical capacitors and resistors; printed circuits; electronic integrated circuits; optical fiber cables, and liquid crystal devices.

Abiding by the promise he made at the BangaloreIT.Com 2001 held in November last, Krishna abolished the 12 per cent luxury tax on imported electronic goods, including television sets; audio and video cassette; photographic and video cameras; electronic toys, clocks, and calculators; digital diaries, and musical instruments.

Grappling with a bloated fiscal deficit of Rs 58.40 billion and a revenue shortfall of Rs 26 billion for the current fiscal year (2001-02), Krishna proposed to raise Rs 2 billion by way of rationalising various sales tax rate slabs and regrouping several industrial and consumer goods.

"As a sop to trade and industry in general which have been reeling under economic slowdown and global recession, I propose to lessen the additional burden being imposed by way of rationalisation of tax structure with the abolition of turnover tax and cess, which collectively comes to 2 per cent," Krishna said while reading out the Budget.

The chief minister has also proposed to scrap entry tax of one per cent on all raw materials and other inputs except those used in making tobacco products and liquor.

In a bid to regroup several commodities and harmonise tax rates, Krishna abolished the rate slab of 10 per cent and classified many of them under 2, 4, 8, 12, 15, and 20 per cent respectively, with tobacco and liquor products incurring a whopping 25 per cent sales taxes in the state.

Resource mobilisation efforts in the new fiscal year from indirect tax route will come from: commercial taxes to the tune of Rs 75.3 billion (63.32 per cent); state excise of Rs 20.75 billion (17.46 per cent); stamps and registration of Rs 10.26 billion (8.63 per cent); motor vehicles of Rs 7.86 billion (6.62 per cent), and Rs 4.72 billion from others, constituting 3.97 per cent of the total tax.

The revised estimates for the current year (2001-02) shows a shortfall of Rs 14.20 billion in total revenue receipts from the projected figures of Rs 232.32 billion made at the time of presenting the Budget around this time last year.

However, prudent fiscal management has enabled the state exchequer to control the total expenditure and limit it to Rs 218.79 billion, showing a savings of Rs 13.97 billion.

After taking into account the surplus in the public account, the closing deficit for the year is likely to be Rs 9.8 billion against the projected Budget deficit of Rs 28.6 billion for the fiscal year 2001-02.

For the ensuing fiscal year, Krishna has estimated the total receipts to be in the range of Rs 255.42 billion, comprising revenue receipts of Rs 187.98 billion and capital receipts of Rs 57.43 billion.

The total expenditure is expected to be in the region of Rs 255.97 billion, including revenue spent of Rs 214.03 billion and a capital outgoing of Rs 41.93 billion.

As a result, the overall deficit is likely to be just Rs 5.5 billion. But with the Budget deficit of Rs 9.8 billion spilling over to the coming year, the closing balance is estimated to be around Rs 15.3 billion for 2002-03.

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