Tax imbroglio puts Karnataka IT sector in limbo

The second round of talks between Wipro chief Azim Premji and Karnataka Deputy CM Siddaramaiah did not make much headway on August 11 with the Government remaining non-committal on the sales tax increase issue. The closed-door meeting was held to urge the government to rethink on the sales tax hike on computers, software and peripherals, which was raised from five percent to 13.5 percent in the state budget.

Deputy CM Siddaramaiah is reported to have said, "The government holds the view that those who can afford to pay tax must pay." Though he also ruled out a rollback on sales tax increase, the beleaguered dealer community still seems to harbor some hope for a positive outcome next week.

IT channels in the state have been facing a very tough sales slump this month ever since the hike was effective from August 1.

"We are having zero sales and already grey operators have started business," said Lalith Prakash Bhartia, a dealer who heads Jupiter Infosystems. He added that sales during the last week of July was a "mini-Diwali" with most dealers recording sales worth one month within one week. Distis like Redington, Ingram Micro and others have been billing from other branches to escape the sales tax hike.

It seems apparent that the state is banking on the prosperous IT industry contribute its mite to expand the Karnataka government's coffers. According to Association for Information Technology (AIT) secretary R Sridhar, who took part in the secretary level meeting, the issue lays in numbers. "The government wants to increase its revenues from IT this year from Rs 95 crore to Rs 250 crore. It wants to make up for the difference of around Rs 160 crore though taxation."

During the meeting, Premji had proposed an increase in professional tax for IT employees as a way of making up for Rs 60 crore. The remaining Rs 100 crore is hanging in balance. "The government is asking us to make a choice between enduring the sales tax hike or suggest ways to bring in Rs 100 crore from the IT sector," Bhartia said.

Senior Wipro officials including CFO Suresh Senapathy are working on ways to bring in the additional revenue from the IT sector into the state.

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