As Budget day draws closer both the hardware and software sectors are busy working on how they can get the best deal from the government. And everyone is saying that the government needs to focus more on the hardware sector this time around. Gaurav Patra & SHIPRA Arora have the details

As Budget 2003 approaches, the Indian IT industry is urging Finance Minister Jaswant Singh to address existing tax anomalies and provide more sops for the hardware industry

Come February 28 and B-Day will be here one more time as Union Finance Minister Jaswant Singh tables Budgets 2003-04 in Parliament. Although the Indian economy is opening up fast, the annual Budget exercise still remains an important part of life for India Inc. And everyone has a wish list of what they would like from the government—drops or increases in duties, tax breaks, etc. In times like these when economic problems are aplenty wish lists simply zoom as the industry tries everything possible to escape the grip of economic woes.
The Indian IT industry too has a wish list of expectations from the government in Budget 2003-04. Here’s how the list looks, and why these items find a place on the list.

Software industry
The software industry as a whole is not expecting anything radical from this year’s Budget. The industry feels that what is needed is a reiteration of the commitments already made by the government, including going back to full tax-exemption for exports.

Also needed is the rectification of the unintended consequences of amendments, which have resulted in the holding back of mergers and acquisitions—an issue that is detrimental for SMEs in particular.

Tax issues
The software industry is one of the largest exporters in the country. China is now entering the software services space in a big way and is catching up on the English-speaking advantage that India has. In this scenario, the Indian software industry has to remain competitive. “What we feel is that exemptions should not be reduced and that we should continue with full exemption, i.e. 100 percent exemption level. From the global marketing perspective, various governments are taking initiatives to provide tax sops,” feels Sudhir Gera, the marketing head of Blue Star Infotech.

Another point of contention for the Indian software industry has been a sub-clause under Section 10A of
the Income Tax Act, under which there is a condition that if the share holding is changed to the extent of 50 percent then all benefits under 10 A get nullified. “In a publicly listed company, it is not in anybody’s hands to prevent shares from changing hands. Change in shareholding in publicly listed companies is very frequent and common. Removal of this clause has been a long pending demand of the Indian software industry,” says Gera.

Further sales tax varies across states. There is need to have a common sales tax structure. “There should be a common standard for sales tax on the domestic side. In fact, we feel that there should be zero sales tax,” says Vipin Tyagi, president & CEO, Network Programs India.

Some states are also enforcing Works Order Tax of 10 percent on software projects, which is like a service tax. “In India we have a problem of low volumes, and on top of that we impose high taxes on these low volumes,” says Kishore Dumblekar, vice president, corporate affairs, Cressanda Solutions.

Another key change industry gurus are expecting is on the income tax front. The industry demand is for an income tax holiday on exports for export-oriented units (EOUs) for 10 more years. Presently there are only eight years left. Almost 60-70 percent of total expenditure for a software company happens on manpower and that is tax-deductible at source. So the IT industry’s contribution to tax is already high.

Global agreements
According to Kiran Karnik, president of Nasscom, the industry would also like the government to pursue vigorously the finalisation of the Totalisation Agreement with the United States, and the tax withholding issue with Japan and other countries. The industry is also counting on the government to protect their interests in negotiations in GATT/WTO. “Hopefully, the government will think long-term and try and make India more competitive and not just go for piecemeal solutions,” says Sanjay Agarwal, director, ESS.

Products
The Indian IT industry has been focusing on the promotion of services. But everybody knows that products is the best space to be in. In order to build India’s strength on the product front and encourage product development in the country, the industry feels that the expenditure on market promotion for products for exports should be an item for tax exemption. “It is time to differentiate and identify the sub-sectors within the industry, like products, which need to be promoted and not just promoting industry as a whole,” feels Tyagi.

Domestic market
The domestic market is experiencing relatively sluggish growth. Keeping this in mind the government needs to increase its own spending on IT, and to create an environment which encourages corporates to invest in IT. In this regard, initiatives in e-governance, including the computerisation of the tax system, Customs, EPF and e-citizen services are particularly welcome. They will make for more transparent, efficient and accountable government even as they provide a stimulus to the domestic market for IT. “The IT infrastructure has to improve. The Budget could provide incentive for such schemes to reach the masses,” feels Nitin Despande, Chief Operating Officer, Geometric Software Solutions.

Also, the rationalisation of excise duty in tandem with import duty would result in a level playing field for domestic companies under a competitive environment. Secondly, once structural and operational issues are resolved to the fullest satisfaction of integrated industries, India can have strong and vibrant service sector by 2010, within which as per experts, IT will achieve the $80 billion exports target.

Hardware industry
The PC has become a tool for communication, productivity enhancement, education, distance healthcare and so on. Thus, it is now the basic tool for delivering all these essentials. The PC has to be made affordable for the masses, and for that to happen, excise, custom duties on components and complete PCs have to be reduced.

“If we want the domestic IT industry to grow then we have to make hardware more affordable. Both the hardware and software industries go hand-in-hand. If the hardware industry grows then the software industry automatically gets a boost,” says Dumblekar. Agrees Rajeev Bapna, managing director of Amkette, “The major thing the Budget can do to boost demand for IT products is to reduce their prices. This can be done through the reduction of excise duty from the current 16 to 8 percent.”

Tax issues
The overall tax incidence should also be brought down. “China has an overall tax incidence of 17 percent and in order to be competitive the overall tax incidence in India should be finally brought down to somewhere between 15-17 percent,” feels Bapna. Presently depending on different products the overall tax incidence varies between 25 to 45 percent. This makes India less competitive as compared to China and other countries. Presently, the taxes to be paid on the hardware side include 16 percent excise duty and 4-12 percent sales tax. “China has benefited from its low tax regime by emerging as one of the largest suppliers of hardware all over the world,” points out Deepak Sharma, managing director, Invensys Powerware.

Some industry experts are of the opinion that there should be an increase in the rate of depreciation on IT hardware from 65 percent to 100 percent. If you can write off hardware in a year then it encourages companies to buy more hardware. This in turn gives a boost to the demand for software. In India more than 65 percent of users use pirated software. This is essentially because of the high cost of both hardware and software. For instance, in PCs the software comprises almost 40 percent of the total cost. And taxes make for almost 20 percent of the total cost.

Another recommendation is to make India a suitable base for IT manufacturing. Not much is happening on this front in the hardware policy. This Budget can be used by the government to do what has been missing in making India a strong manufacturing base. “What we need to do is a rationalisation of the tax structure. There is uncertainty from year to year as to our tax policies. All of these have an implication on the industry. If the uncertainty remains then it will have an adverse effect on the hardware industry,” says Bapna. So, what the industry needs from the government is an announcement at least a three-year policy for the hardware industry, so that they can have an idea about how the duty structure will look like. This will create an environment of greater certainty, which will in return help in attracting more investments into the country.

A uniform sales tax system is also a demand of the hardware industry, just like the software players. As far as the IT Agreement at the WTO is concerned the industry sees it as the way ahead. The impact of WTO on the Budget will be year-to-year reduction of duties. Adhering to the phase-out of the duty structure on peak rates as proposed by WTO should be the way to go, as this cannot happen overnight. From 25 percent we now have 15 percent. Over the next year it should come down further before eventually hitting 0 percent in 2005.

“There are various anomalies in our tax/duty structure, which need to be looked into by the government in the Budget. The structure is such that it makes the import of a finished product more affordable and cost-effective rather than manufacturing it in the country,” comments Malhotra. Agrees Rajesh Tuli, managing director, Coral Telecom, “What we are asking for from the government is not concessions and benefits. What we want is a level playing field for Indian IT manufacturers. Presently excise and sales duty is so designed that it is cheaper to import.” Adds Sharma, “The government will have to stop looking at customs duties as a revenue source and augment collection of tax on income.”

R&D
R&D is a growth booster for industry. On the R&D front, there is not much activity happening in India. If the manufacturing base grows and gets strengthened then R&D follows. Presently India has a small manufacturing base. However, India still has a lot of potential. Till now half-hearted steps have been taken, but this year India has the opportunity to take a giant step towards becoming a manufacturing base through the Budget. If this happens then R&D will automatically follow. And this can be possible through two steps—announcing a longer-term duty structure and simple and unambiguous policies.

To enhance R&D the Government also has to reduce customs duty on equipment imported exclusively for R&D purposes. “The government should provide incentives to the private players to invest in R&D. The government did set up some funds but they did not go anywhere. There needs to be a new impetus both from the government and private players. There should be corporate income tax exemption for developing new design or IPR,” feels Sanjay Handa, senior manager, commercial, Tyco Electronics.

According to MAIT, a 15 percent growth (in PC volumes) is expected in 2003-04. However, if the government accepts the above mentioned recommendations of reducing excise duty to 8 percent, and sales tax to 2 percent, then the growth in PC volumes will be almost 30 percent in 2003-04 and PC prices will come down by 12 percent in the same time frame.

Today, the major success story for India at the global level is its software industry. However, the government needs to clearly understand that to provide a base for the software industry’s sustained growth, it is imperative to back it up with a strong hardware industry. The industry is hoping that Budget 2003-04 will take a giant step in this regard.