Budget 2004: Good intentions are not enough

Before this year’s budget was announced, industry circles were hoping for another Chidambaram classic. But while major positives did materialise, it also dealt a severe blow to assemblers, says VENKATESH GANESH

According to S Rajendran, it will now be cheaper to import finished goods than assemble computers locally

THE government is going to adhere to the April 1, 2005 deadline, when WTO rules come into play. While the decision to abolish excise duty on finished PCs is a healthy sign as it aims to gradually eliminate the grey market and give a fillip to organised (both local and MNC) players, no one knows exactly how much PC prices will drop. Companies such as Wipro Infotech have conservatively pegged the reduction in computer prices at between one and two percent, while Zenith estimates a drop of over eight percent.

This has been primarily due to the lack of a specific clarification from the government regarding the fate of countervailing duty (CVD) on components used for manufacturing computers. While consumers can rejoice, Indian PC assemblers are not exactly in a confetti-throwing mood; they have been credited for developing the price-sensitive Indian market for various segments, and account for 53 percent of overall PC sales that are close to three million units at present. The government’s action of reducing the excise duty without clarity on the duty structure of components means that importing a fully assembled PC is cheaper than sourcing components and assembling them in India. Says S Rajendran, general manager, Acer India, “It will now be cheaper to import finished goods rather than assemble computers locally.”

Another factor to be considered is that the weighted import duty on components is the same as that on assembled PCs. This will be a deterrent to assembling PCs locally. Explains B N Agarwal, director, PCS Industries, “Earlier, an Indian PC assembler could save 0.5 percent on costs (since labour is cheaper here) as the cost of assembling a PC outside India is 1.5 percent.” Since the waiver is granted only on computers, the 16 percent duty is still applicable on components, which makes importing a machine more viable. This can even extend to manufacturers of monitors, printers, keyboards, UPS and mice whose survival is now in question.

The only light at the end of the tunnel for local players is in the fact that they can get some marginal benefits if they shift from domestic tariff areas to hardware parks. A cross section of Indian PC manufacturers opines that imported PCs could still be expensive when compared to those locally manufactured since the cost of logistics, distribution, transportation and service charges still remain.

Hardware market dynamics

The goodies announced in the budget carry forward the measures announced in the mini-budget that the NDA proposed earlier this year.

Interestingly, the government has said that by abolishing excise duty it is encouraging local manufacturing. It is doing precisely the reverse. Take the case of excise reduction on PCs; the overall excise has been reduced on PCs whereas there are no parallel reductions on PC components.

MNC players opine that it would be cheaper to import PCs rather than assemble them in India, considering the duties imposed on various knocked-down components. The majority of PC manufacturers such as IBM, Acer and HP have invested in India, and it is only Dell which gains from this announcement (since it imports its machines from abroad). While an imported PC is charged a 10 percent customs duty overall, a host of components that go into making a computer still attract custom duty plus CVD which pushes up costs for the assembler. According to MAIT, as much as 90 percent of the market comprises PCs that are either assembled or manufactured in India.

Elucidates Agarwal, “Under the current structure existing in the budget, this would mean the end of manufacturing in India. However, we are positive this will not be the final decision and the government will take corrective measures.”

Take for instance a component such as memory that attracts 10 percent customs duty and 16 percent CVD. Similar is the case with monitors and speakers that attracts 10 percent customs and 16 percent CVD. This effectively means that a PC vendor pays only 10 percent customs duty if he purchases a finished computer vis-à-vis assembling components locally in which case he will end up paying the same ten percent at customs and an additional 16 percent CVD plus a two percent cess. This effectively means that the duty on inputs is more than that on the actual PC. MAIT has already tried to rectify the situation by taking up this anomaly with the government; it is now hoped that the CVD on components is removed.

Another issue that has cropped up is the taxation of annual maintenance contracts (AMCs). It is approximately 12 percent of the overall amount, and this will hit the industry on a second front. With wafer-thin margins in hardware, players were relying on AMCs for generating sizeable revenue, but if this new taxation is legislated then players will be cut both ways.

These issues faced by the computer industry post-budget have already been brought to the FM’s notice, and an assurance has been given to manufacturers that their problems will be addressed shortly.

‘Hello’ telecom

Meanwhile, the telecom industry and its ancillary players are enjoying the ‘feel good’ factor. The first good news came in the form of an increase in the FDI limit to 74 percent. The budget also reflects the government’s focus on telecommunications as a key sector. “A key measure includes exemption of mobile switching centres from import duty since it will help mobilise investments and reduce the cost of procuring telecom equipment and mobile handsets,” says Aashish Chowdhary, country head, India and South Asia, Nokia.

These initiatives will supplement the operators’ efforts to build telecom infrastructure across the country, provide affordable services, and accelerate wireless penetration in India. Agrees Pranav Roach, president, Hughes Network Systems India, “Going forward, estimates indicate that to scale up the telecom infrastructure to global standards the sector will need investments to the tune of $8 billion. India needs to achieve a lot particularly with respect to tele-density, Internet usage and convergence.” In addition to the extension of the tax holiday by another year, there are other sops offered by the government in the form of exemptions on customs duty on mobile switching equipment, and capital goods that are used for manufacturing mobile handsets.

Yet some issues have not been addressed. Convergence of telecom technology has been left untouched, as was the case last year. Now with the possibility of television (especially since CAS has not been given a complete burial), telephony and Internet access over a single medium (such as terrestrial or satellite) becoming a possibility, the budget could have addressed this issue in more detail. Also, telecom users will have to pay a service tax of 10 percent, instead of the existing 8 percent.

What’s in it for software?

The indirect benefit of reduced hardware prices could help the software services industry. The IT industry heaved a collective sigh of relief on the discovery that the budget neither touched the existing tax structure nor imposed any turnover tax. Additionally, the attempt to give impetus to R&D in the automotive sector could probably lead to a spurt in investments in technology, design and primary automotive research. The natural fallout could be investments in CAD/CAM, design prototyping and embedded software for control systems. Avers Ajay Prabhu, vice president, Quest, a player in the design engineering space, “This is a welcome move as manufacturers are moving towards R&D, and this step would enable them to gain a foothold in the global arena.”

The latest pin-up boys of Indian IT services—BPO units—are awaiting the FM’s nod on the taxation regime. Nasscom has already made a plea to the ministry to keep this sector out of the tax net. Industry observers opine that units may get a waiver if they can prove that they have maintained an arms-length pricing relationship with foreign companies. Some biggies are of the view that BPO and software companies do not need tax relief, and that the government should instead look at empowering Indian companies to tackle international competitors.

In summary, this budget is one which has raised more questions than answers—despite the noble intentions of the honourable finance minister.

venkatesh@expresscomputeronline.com