ICT gets a boost in Indian budget 2006

Mar 01, 2006

Even as the country's software and biotechnology sectors have expressed "disappointment" over the 2006 budget announced by India's Finance Minister P. Chidambaram Tuesday, many in the IT industry are elated over the attention this budget has showered on the country's IT manufacturing sector.

"For the first time ever, the (Indian) budget has given a focused attention on IT hardware manufacturing in the country," said Vinnie Mehta, executive director of the country's IT hardware lobby, the Manufacturers Association of Information Technology adding that "Budget announcements are indeed terrific."

Interestingly, the Indian budget has achieved this not by providing any extra sops to domestic manufacturing but by re-imposing an excise duty (imposed at the point of sales) at 12 percent while allowing local hardware makers to get tax credit for their inputs to negate its impact on the final price.

Two years back, the Indian government had exempted fully built computers from excise duty to boost the use of computers in the country but in an anomalous duty structure had retained the 16 percent excise duty on input components. Consequently, local hardware manufacturers which depend heavily on components were unable to compete with imported hardware since they were not allowed to offset the taxes on their input components.

"But now that anomaly has been removed," said Mehta. The budget has imposed a 12 percent excise duty on computers and simultaneously has removed components like DVD drives, flash drives and combo drives from the excise duty gambit, "that not only makes imported hardware more expensive but by allowing by allowing local manufacturers to avail a value added tax credit, makes locally made hardware more competitive and also encourage manufacturing of high-end products such as notebooks and servers."

But the good news for local hardware does not end there.

"I wish to promote India as a preferred destination for hardware manufacturing," said the Finance Minster, "for which the Ministry of Information Technology has been instructed to come out with a new policy for manufacturing of capital intensive hardware products such as Semiconductors, Assembly, Testing and Packaging of Semiconductors, LCDs, and storage."

"The budget then has several pointers that would lead to creating an eco-system for manufacturing," said P. Balaji, president of the Telecom Equipment Manufacturers Association of India who is also the vice president of the Indian operations of the global telecom equipment manufacturer Ericsson. "The finance minister's pronouncements on a manufacturing policy, boosting e-governance projects, and lowering of duties on hardware would in due course lead to this."

Nevertheless, while the telecom equipment and IT manufacturers have welcomed the budget, the country's money-spinning software services sector that earns over $23 billion a year from exporting software services mainly to the developed world is disappointed.

This budget has proposed to impose an 8 percent excise duty on packaged software sold over the counter and has also struck a blow to local back office outsourcing by bringing such services under the fold of the 10.2 percent service tax that the country had imposed on the service industry two years back.

Although the 8 percent excise duty does not apply to customized software and software packages downloaded from the Internet, in a big blow to global software giants like Microsoft, Oracle, Adobe and the likes, it brings computer games, operating software like Windows and other packaged software under its ambit and thus makes it costlier.

"We are deeply concerned about the increase in levies on packaged software," said NASSCOM, the country's software lobby, which it says will result in higher prices and have an adverse impact on millions of customers and on the domestic IT market.

"It will be a setback to efforts to promote IT utilization in the Indian economy and for vital applications like education and health," said NASSCOM. "At a time when technology and market demand were driving down prices, we see this as a retrograde step."

Disappointed too is the country's biotechnology sector which had made several recommendations in form of tax breaks for making India a global research and development hub for biotechnology.

"The Biotech industry had expected support from the budget on these recommendations as well as fiscal measures to increase domestic investment and FDI (foreign direct investment) and to compete and achieve a leadership position vis-à-vis countries like China, Singapore, Korea and Eastern Europe," the Association of Biotechnology Led Enterprises (ABLE), a forum of Indian biotechnology companies, said in a release.

"But ABLE is disappointed by the lack of the much needed emphasis and thrust to the Biotech sector in the budget today," the group said.

Yet on a macro perspective, says Frost & Sullivan, the global consultancy firm, "this budget carries a number of positives for the Indian ICT (information and communications technology) industry."

According to its analysis the stated objective of the budget is to keep the momentum up in the social sector and simultaneously, target for higher economic growth. "Both of these aspects will translate into a greater penetration of ICT in India," says Alok Shende, director, the ICT Practice at Frost & Sullivan India.

According to him higher economic growth will translate into a higher disposable income for Indians and greater investments for the corporate world, and these in turn will contribute to an increased ICT spending in country driving growth for the sector in the long term.

Copyright 2006 by United Press International

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