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| March 16, 2001 | atimes.com | ||
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India/Pakistan
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: 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. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.) |
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