Software stocks were discouraged by reports that increased legislation in the US may hamper outsouring orders from that country.

In response, software bellwether Infosys Technologies (down 0.9% to Rs 4,175), Indian IT giant Wipro (down 2% to Rs 1,421), Digital GlobalSoft (down 1.1% to Rs 631.90), Satyam Computer (down 1.1% to Rs 220) and HCL Technologies (down 1.1% to Rs 169), all saw fortunes on the ebb.

Second line tech stocks were in recession as well - Geodesic Information (down 4.9% to Rs 100), PSI Data Systems (down 4.5% to Rs 55.60), Kale Consultants (down 4.4% to Rs 32.15), Maars Software (down 4.1% to Rs 11.70), R S Software (down 3.7% to Rs 24.60), i-flex (down 3.2% to Rs 863), Hexaware Technologies (down 2.5% to Rs 127.50), KPIT Infosystems (down 2.3% to Rs 180.40), Aftek Infosys (down 2% to Rs 168.50), VisualSoft Technologies (down 1.9% to Rs 180), Geometric Software (down 1.9% to Rs 495), Polaris Software (down 1.7% to Rs 142.75) and Mascot Systems (down 1.5% to Rs 118.85).

On Monday, most software shares ended in the red. But they had rallied Friday after the finance minister announced the restoration of 100% tax benefit on exports for units located in software parks etc from the earlier tax benefit of 90% in the budget. Software stocks had been volatile over the last few trading sessions as it was feared that taxes would be hiked in the budget. Volatile global markets amid US-Iraq war fears also compounded that volatility .

On Monday, the combined market capitalisation of 23 large software companies fell 1.5% to Rs 87,289 crore (Rs 872.89 billion). In the last one week, their market cap rose 1% whereas in the last one month it moved up 1.4%.

The weakness in IT shares today stems also from the fall in Nasdaq on Monday. But reports that another US state, Washington, is considering a bill that would put barriers on outsourcing, is sending jitters down the spines of software companies. IT analysts feel, however, that the bill may not likely affect outsourcing. It may create some barriers on that front, though. The bill is basically aimed at reducing layoffs in the US, analysts say. The issue primarily relates to moving of jobs out of the US due to outsourcing. A few months back another US state New Jersey had proposed such a bill.

Analysts say the bill by the state of Washington will impact outsourcing to the extent that it will create procedural hurdles which would result in some delays. However, outsourcing as such is unlikely to be impacted.

On the flip side, there is a strong interest for Indian IT services abroad. Client visits are believed to be taking place at a brisk place. "Even smaller IT companies are seeing 2 to 3 client visits a day," says Pratish Krishnan, IT analyst with Cholamandalam Securities.

It will, however, take time for outsourcing orders to flow in a big way to Indian IT firms. Infosys, though, is getting good orders.

Analysts expect Q4 results of most IT companies to be strong, particularly that of Infosys and Digital GlobalSoft .

The restoration of 100% tax benefit for software units actually came as a pleasant surprise, what with the market fearing that the government would in fact reduce such tax benefits. In the last budget, the then finance minister, Yashwant Sinha, had lowered 100% deduction of export profits to units existing in trade zones to 90%. The 10 A/10 B benefits are available for software units set up before 2010. The restoration of tax benefits will add to profits of units located in software parks/free trade zones. With most IT firms having 50% revenues from offshore, net profit of IT firms is expected to go up by about 1-2%.

Additionally, the FM also suggested more sops to IT sectors like rectification of 10A/10B to maintain status quo post merger and acquisitions. Thus, tax benefits will continue post M&A. Currently, a change in shareholding pattern results in companies losing 10A/10 B benefits. It has been a long-standing demand of the industry that the sub-sections related to merger / amalgamation should be removed as they were hampering the consolidation of the industry in India. With the removal of these provisions, one can expect a fresh round of merger and amalgamations manifesting in the software sector in the near future.