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March 4, 1999

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Hardware sore: Yashwant Sinha's Budget has put a face to the industry's worst fears. The Budget proposals of Finance Minister Yashwant Sinha, who has described information technology as the industry sector of the future, have further widened the divide between India's hardware and software industries.

Email this story to a friend. The Manufacturers' Association for Information Technology, the apex organisation of hardware manufacturers, is clearly disappointed by the Budget proposals but the National Association of Software and Service Companies, which represents the software industry, is delighted.

MAIT Director Vinnie Mehta has described the Budget as "insipid" and said it does not make any reference to the recommendations of the IT Task Force that was appointed by Prime Minister Atal Bihari Vajpayee himself.

Almost all recommendations of the first part of the task force report dealing with the software industry have been accepted while the second part dealing with hardware is yet to be taken up.

The Budget has proposed a hike in customs duty on computer systems classified as finished products from 20 to 25 per cent.

MAIT officials point out that this increase exceeded the customs duty limit laid down in the Information Technology Agreement of the World Trade Organisation.

Vinnie Mehta of MAIT says a duty increase from 10 to 15 per cent on computer parts and components is expected to increase the prices of end products by at least 5 per cent.

MAIT has been campaigning against the unorganised market of computer assemblers called grey market. Vinnie Mehta claims that now the grey market will thrive because unlike its competition it does not pay any tax or duties.

The non-removal of the special additional customs duty of 4 per cent was also criticised by MAIT as that would further squeeze the profit margins of manufacturers.

Vinnie Mehta believes that the computer manufacturing sector will continue to be disadvantaged due to the lack of adequate duty differential.

The increase in excise duty on computer systems from 13 to 16 per cent is expected to jack up prices of computers by 10 to 15 per cent, industry sources say.

The saving grace for computer makers is the reduction in customs duty on parts and components from 10 to 5 per cent. Also, duties for all storage devices have been cut from 10 to 5 per cent. Earlier, only floppy disk drives and hard disk drives could enjoy the 5 per cent duty.

However, Vinnie Mehta says it is welcome that the entire expenses by the corporate sector to make their IT systems Y2K compliant would be considered as expenditure and thus not taxed.

NASSCOM President Dewang Mehta says the software industry is delighted by the budget although it does not have any fiscal sops to offer to the sector that is growing at a scorching pace of over 50 per cent. "We did not want any sops, we did not want any sops to be withdrawn either," he maintains.

He, however, says the industry would expect the government to clarify the tax consequences of the employees stock option and sweat equity schemes.

The industry would want to know whether ESOP and sweat equity would be taxed twice, one at the time when the employee exercises the option as a perquisite and then at the time of sale.

"We are capable of reaching 4 billion in software exports in 1999-2000 as we keep the 50 per cent pace in growth," the NASSSCOM chief claims.

The IT Task Force report on software has given impetus to the industry to reach the target of 100 billion by the next decade, he says.

- Compiled from the Indian media

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