Budget trashes PC penetration dream

The Indian government dreams of bridging the Digital Divide and has grandiose ambitions of IT-enabling India, but when it comes to action, there’s not much on the ground. Take Budget 2003, which could have been a great opportunity to kick-start a move towards greater PC penetration. Yet, the government chose to look the other way. Srikanth R P tells you why this Budget was bad news for the domestic IT industry

“IT is India’s showpiece success story.” So began Finance Minister Jaswant Singh in the part of the Union Budget 2003-04 that dealt with information technology. Next came the line, “We have to not just maintain its momentum of growth but continuously encourage it.” With these lines Singh had the entire industry hoping against common logic that he would finally do something for the ailing hardware industry. But unfortunately, as most resellers and hardware vendors expected, there were no miracles as the minister decided to stick to the same old beaten track.

The blue-eyed boy again was software, which got back the concessions extended under Sections 10A and 10B. Another positive benefit was the continuation of tax benefits even in case of change in ownership or shareholding.

Bad for domestic IT
While most industry sectors and even the common man has been happy with the Budget, it was surely a disappointing one for the domestic IT industry. The logic that growth in the installed PC base is critical to growth of the domestic IT industry does not seem to cut any ice with the finance ministry. All the hardware industry got was a reduction in Customs duty from 15 percent to 10 percent in the case of routers, modems and fixed wireless terminals. What about the rest of the components that go into a PC? Fact is, the duties on every one of those components still continues to be way above duties imposed by most countries. (See Box: Duties in other countries) Industry veteran, Zenith Computers managing director Raj Saraf sums it up when he says, “There has been no change as there is no concession for the hardware industry.”

For instance, if an importer imports parts of a PC, such as a motherboard, monitor or memory, he has to pay 15 percent basic Customs duty. On this sum, another 16 percent excise duty is added, plus there is a 4 percent special additional duty (SAD). While components like the CPU and CD-ROM drives are exempt from basic Customs duty, an importer still has to pay 16 percent excise duty plus the 4 percent SAD. And that’s not all. One has
to fork out an additional 4 percent sales tax and even octroi of 5.5 percent in the case of states like Maharashtra. After paying all these taxes, the average price of a PC zooms up by a massive 43 percent. So is it a surprise that the PC continues to remain beyond the hands of the average Indian?

While the government has proposed positive steps in priority areas such as infrastructure development and for enhancing manufacturing-sector efficiency, the domestic IT industry has not been given the priority it deserves.
Says Manoj Chugh, president-India & SAARC, Cisco Systems, “The Budget has proposed concrete steps in priority areas, which are expected to drive demand for the domestic IT industry. But it will be possible to gauge the impact of these areas on the IT sector only when we get down to the brass tacks of implementation. In this light, we believe that deploying IT has a direct role in achieving efficiency in priority areas. We believe that a strong domestic IT industry is critical to long-term economic growth. Therefore, it was disappointing that greater and more direct support to the cause of growing the domestic IT industry was not given the priority it deserves.”
He goes on to add, “There is a strong correlation between investments in IT and GDP growth. However, for this to happen, affordable access to technology is extremely important. High technology products not manufactured in India play a centre stage role in accelerating the deployment of IT. This Budget does not address that issue. For instance, the cumulative duties on networking equipment, which is currently between 33 percent to 39 percent, needs to be in line with the 0 to 15 percent as in other ASEAN countries.”

This view is shared by many resellers and distributors that Express Computer spoke to, who said that they were hard pressed to explain to their principals the high rates at which they are forced to sell to local customers. India should perhaps take a cue from neighbouring countries like Bangladesh and Sri Lanka, which have simpler and much reduced tax rates. For instance, Sri Lanka has totally exempted IT products from import duties while Bangladesh levies only 4 percent duty on IT products, which is all inclusive. Compare this to India where the total taxes come to a massive 43 percent. Additionally, Sri Lanka and Bangladesh follow a much simpler tax system too.

Says Aditya Bhuvania, director, Priya group, “Instead of an ambitious wish list loaded with lots of demands, we would have liked the government to halve the existing tax rates by 50 percent. For example, the domestic IT industry would have got a boost if the basic Customs duty was reduced from 15 percent to 7.5 percent for all IT products. Excise duties that continue to remain at 16 percent should also be reduced by a significant margin.

Similarly, the government should seriously consider removing SAD. To summarise, I would say that it is a good Budget for the common man but a disappointing one for the IT industry.” It is not surprising therefore that most hardware players are unanimous in saying that all the FM has merely done is to provide a cosmetic touch by reducing duties on modems and routers.

Adds K R Naik, chairman and managing director of D-Link India, “The IT manufacturing industry is clearly disappointed that the reduction in excise duty did not materialise. This would have helped counter the threat from the grey market. The industry also expected steps that would reduce the cost of simple IT products like PCs. The duty benefits granted to high-end products like routers and high-end modems, which are used by large enterprises and big corporates would not make much of an impact in increasing PC penetration.”

The grey market threat has not been taken into consideration at all by the finance ministry. Importers estimate that more than 70 percent of the memory market in India comes through the smuggled route—simply because memory modules can even be slipped into shirt pockets and smuggled in. An importer therefore is a heavy loser when he imports memory components through the official route. If the government can step in and rationalise the duty structure, it could bring in more revenues for the government itself. Perhaps the government should take a cue from what it had done for the software services industry, where there is no interference at all.

It’s time the Indian government realises that the dream of becoming a global IT superpower can only happen when we have strong foundations. Without the foundation of the domestic IT industry, it is wishful thinking to dream of flying high when in fact our wings are not strong enough to fly in the first place.