A new burden

Tamil Nadu government's massive revenue raising move last week has caught the software product marketers unawares. The state has imposed a 4 percent sales tax on software products effective December 1. This was most unexpected as they did not have any inkling about the change in tax status of the software segment.

Prior to this, software products did not attract any sales tax in the state. With this, Tamil Nadu joins a handful of states including Delhi, Kerala and Maharashtra to tax software products. Last March, neighbouring Karnataka state had imposed a 4 percent sales tax on software products. The software industry made several representations against the move and subsequently, the Karnataka government withdrew the tax.

In the interim period, a large number of software marketers moved their operations outside the state to save on the sales tax. Many of them are yet to move back and are actually waiting for a stable tax policy. Tamil Nadu has been a major beneficiary of Karnataka's ill-advised move to tax software products. A number of companies just crossed the state border and set up their billing operations here. Now the reverse may happen and Tamil Nadu could be a loser. Because it will take those jobs from Tamil Nadu to other locations. Companies will not lose any opportunity to retain their competitiveness through cost reduction and greater efficiency.

Unfortunately, the tax burden has come at a time the software segment is struggling due to reduced orders for its services from the key market of the USA. Software products contribute a small part of the domestic IT industry. The nature of the software product is such that it can be replicated quickly from the original version. Hence piracy is rampant among users and by and large our people are reluctant to pay for software services and products. The fact that the price of software products is quite high compared to that in other foreign markets. For instance, the licensed version of a popular Office suite costs approximately Rs 20,000. Very few buyers of PCs, who get to buy the machine itself for Rs 40,000 are willing to pay 50 percent more just for this software. A typical user would require a few more such software and these together increases the cost of acquiring a computing machine highly expensive. More so, considering the fact that a middle class family would have to invest earnings of at least 6 months to buy a PC. In the developed markets, the comparative cost would be a fourth of a month's earnings of an equivalent family. Anyway, a rival offering is available free. These factors have contributed significantly to the emergence of a thriving market for pirated software in the country. Tamil Nadu is no exception to the national trend.

According to industry reports, even the much-hyped Windows XP, the latest software from Microsoft has not set the market on fire. The sluggish market conditions have led to corporates, the largest buyer segment, from upgrading their existing software. Individual users too have not been enthusiastic about the new software offerings.

So far, the government has been very supportive of the IT industry and has been successful in creating a vibrant software and hardware segment in the state since the 1990s. Chennai is still among the hottest IT destinations and it would not be wise to give contrary signals by such a tax.