Ripples, not revolution, for India's IT industry

[Irfan Khan <khania@super.net.pk>]

March 16, 2001 

Ripples, not revolution, for India's IT industry 

By Frederick Noronha 

BANGALORE - Budget 2001 meant a boon for some, sops for others and
disappointment for yet others in India's booming IT industry, a sector on
which the country pins much of its hopes to sustain economic growth. 

Lobbyists such as the National Association of Software and Service
Companies (Nasscom) - an umbrella body of software industry - received much
of what they had asked for. Hardware vendors, however, were clearly upset.
ISPs (Internet service providers) received some tax breaks, but were
disappointed all the same. 

ISPs and telecommunications companies won some tax holidays, with
incentives to upgrade IT education. There was even an official fiat to push
computerization of the government in the budget. 

IT has become one of the few fields in which India is proud, and hopeful
about. Recently, a Nasscom-McKinsey report suggested that by fiscal
2000-01, India's software industry would touch US$8.6 billion (up from $50
million in 1990-91). It is projected that software and IT services earnings
will achieve annual revenues of $87 billion in 2008, making it an industry
which needs to be taken very seriously. 

But initial enthusiasm over the budget of 2001-02, delivered in late
February, has evaporated, leading to considerable disappointment in the IT
sector. On close examination of the fine print, the picture is not as rosy
as first thought. 

India, as a potential software giant, is threatened by low personal
computer penetration, but there was little to cheer for users hoping to get
access to cheaper PCs. 

Zenith Computers and Zenith Infotech chairman and managing director Raj
Saraf comments, "The 2001 budget has been very bad as far as the hardware
industry is concerned. [Federal IT minister] Pramod Mahajan had announced
that 2001 would be the year of hardware, however, the duties are the same
and nothing has changed." Zenith is one of the major hardware players in
the country. 

Software players welcomed some aspects of the budget. But others pointed
out that the effective rates of customs duties on components and
sub-assemblies have actually gone up. This is clearly not an encouraging
sign for PC manufacturing or assembly in India. 

Some proposals from the budget that directly relate to the IT sector include: 

Government departments, federally-run public sector undertakings (PSUs) and
banks have been directed to "fully computerize operations" by March 31, 2002;

Earnings of IT companies from work done onsite in other countries will
receive the same exemption from corporate tax as do other export incomes.
This is aimed to clear earlier confusion on this score;

India's IT firms can now go in for mergers and acquisitions, as henceforth
a change of ownership in EOUs (Export Oriented Units), EPZs (Export
Promotion Zones) and SEZs (Special Economic Zones) will not alter the
10-year tax-holiday status of such units;

ISPs and broadband networks have been given a five-year tax holiday to
encourage growth;

Donors offering help to engineering colleges will receive a tax-deduction,
to the extent of 100 percent. This is aimed at facilitating the upgrading
of the technical educational infrastructure;

Customs duties will no longer face a 10 percent surcharge. This will lower
computer prices - but only by about 1.8 percent;

Telecom equipment, computer components and computers will now face a peak
rate of 15 percent customs duties. Earlier, the peak rate was 25 percent.
But since most computer components and systems already are at the 15
percent duty level, there's not likely to be any perceptible benefit from
this;

Excise duties will be charged at a single rate of 16 percent. Earlier,
there was a three-rate regime. But again, since most computer systems
already face excise at 16 percent, no benefit is expected;

Providers of leased circuits, online information services and databases and
scientific or technical consulting services have been slapped with a 5
percent "service tax";

Indian employees of overseas firms who receive employee stock option plans
(ESOPs) can now invest up to $20,000 overseas every year;

Roorkee University, in North India is to be upgraded to the status of the
prestigious IITs (Indian Institutes of Technology). IITs are the centers of
learning the churn out most of India's top engineers and software brains.
Existing IITs are to have their outlays increased, while 43 regional
engineering colleges (RECs) are to be upgraded;

IT education will be promoted in schools and colleges, and; 
Bank loans, up to 400,000 rupees ($858) without collateral and up to
750,000 rupees with collateral, are to be given for IT education within
India, and up to 1.5 million rupees for education overseas. 

One of the biggest complaints came from the IT hardware front, particularly
over PCs, as there was only a marginal change in the duty structure. 

MAIT, the Manufacturers Association of Information Technology, saw one
silver lining in the government's plan to use more computers. This, the
hardware vendors' body felt, could halt the slump in hardware purchases. 

Some questions have, however, been raised over how exactly the government
plans to boost the use of IT in government departments. 

Other proposals, meant for general industry, will also be of use to the IT
sector. For instance, 100 percent of American depository receipts or global
depository receipts proceeds can now be invested in acquiring foreign
companies. The limit is $100 million, or 10 times export revenues,
whichever is higher. This could boost overseas acquisitions. 

Indian IT companies planning to test foreign waters see this as a good
opportunity. "It will result in providing better flexibility to the
investors of these companies whose shares are listed in both India and
overseas, something the industry had been demanding since last year," says
Nasscom chief Devang Mehta. 

Contrary to earlier fears, ISPs were spared of a 5 percent service tax.
E-commerce, too, has been spared taxation as of now, a demand that had been
put up by Nasscom. 

Internet users in India could find their connectivity improves. ISPs and
broadband service providers are now entitled to a five-year tax holiday.
This could boost India's poor Internet connectivity, and lure foreign
investment. 

But, on the other hand, Finance Minister Yashwant Sinha has taken away with
the left hand what he gave with the right. Leased lines connectivity has
been slapped with a 5 percent service tax on leased circuit holders. ISPs
have protested, saying the most profitable part of their customer base
comes from leased lines. 

Nevertheless, ISPs have welcomed the five-year tax holiday from income tax
and a 30 percent deduction from profits for the next five years. They
didn't quite get the "industry" status they were looking for, but these
moves virtually gave them the benefits they were seeking to achieve that
status. 

More funding for engineering colleges is seen as a move that could fight
off the severe shortage of quality software professionals, expected as
early as next year. 

"The flow of private donations to the engineering colleges will be made 100
percent tax-free, which is great. Nasscom will now set up a large fund to
provide support to IITs and other institutions," Nasscom president Dewang
Mehta told the media. 

Hardware vendors were cautious about the finance minister's promise to
bring down the duty on inputs to zero. "We will have to wait for the budget
notification to see which inputs are included in that list," MAIT director
Vinnie Mehta says. 

Duties on telecom equipment have not changed considerably, though the peak
rate of basic customs duty on this equipment was cut from 25 percent to 15.
Now, hope is seen in the fact that the government will reduce duties to
zero by the year 2003. 

(c)2001 Asia Times Online Co, Ltd


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