The Budget Wishlist

It’s a unanimous call made by the entire IT industry, bureaucrats and even
politicians. The time has come for India to provide a much-needed impetus to
growth in the hardware sector. While the need for faster growth in hardware has
been felt for long, the US-led economic slowdown and emerging threat from China
have suddenly pushed the issue into the limelight.

All CEOs contacted by Dataquest agreed that if India wanted to sustain its
buoyant growth in the IT sector, it had to nurture its hardware sector. Their
common refrain–"The industry cannot sustain itself standing on just one
foot." To sum it up in the words IT and telecommunications minister Pramod
Mahajan’s used at the Dataquest IT Man of the Year Award event, ‘‘I don’t
have a budget wishlist for the software sector. Whatever the industry needs has
already been granted. What needs to be taken care of today are the hardware and
telecom sector, without which the country cannot sustain itself as the main
force of IT in the global marketplace.’’

No wonder then, that as finance minister Yashwant Sinha presents Union Budget
2002 on February 28, the IT industry is looking to incentives that could change
the shape of things in the years to come. Read on for the industry’s concerns
and key demands.

The three prongs: Domestic demand, shift to manufacturing and a future in
exports

The biggest issue facing the hardware industry is the zero-duty regime under
ITA-WTO. What’s more, while the fast changing technology environment,
triggered by convergence, seems to be throwing out of gear the existing
products, the industry is also worried about the falling share of Indian
hardware sector in the global market which stands at less than one per cent
today. According to the manufacturers association of information technology (MAIT),
the lack of government support to hardware manufacturing in terms of simplified
processes not only slows the pace of doing business, it also results in high
turnaround time.

Also, frequent policy changes have eroded investor’s confidence, as the
industry is unable to do any long term planning. This has lead to very low
investments in manufacturing–just about Rs. 1,300 crore since liberalization.

To rectify the situation and ensure that India emerges as a vibrant
manufacturing base for hardware, MAIT has proposed a three-pronged strategy.
First, create exponential demand for hardware products in the domestic market.
Second, create sustainable manufacturing environment. Third, increase exports of
hardware and embedded systems. According to the association, the Indian IT
industry can achieve critical volume only by streamlining the duty structure and
being sensitive to the prices of critical components. The industry also needs to
develop local content to create utility for hardware and low cost access devices
and PCs, according to MAIT.

MAIT: Hardware hardsell

The first amongst MAIT’s wish list is the ITA-WTO implementation. The
association has recommended that despite being committed to the treaty, the
finance minister should push through the zero-duty regime in 2005 instead of the
proposed deadline of 2003. The manufacturing industries have also demanded
rationalization of customs duty and correction in the present inverted tariff
structure. While, suggesting that customs duty on all capital goods for
electronics manufacturing including tools, dyes, and moulds from the existing
25% to zero level, the association has also demanded that the same for input raw
materials including dual usage items like steel, plastics, chemicals should also
be bought made zero. The association is also demanding a uniform 8% excise duty
on all IT products. This, MAIT suggests is not only essential for combating grey
market that presently has 35% of the PC market share, but also help in bringing
down the price of IT products in the country. According to a MAIT study, the
loss of revenue in initial two years will be more than offset by volumes
generated in the third year. The industry is also demanding removal of 4%
special additional duty (SAD) and 100% depreciation on IT products and PCs from
the existing 60% level. This will enable small and medium enterprises to invest
in IT and stay competitive. Also, this would enable businesses to donate used IT
products to schools and colleges because the book value of these products would
be nil, increasing IT penetration.

Nasscom: Bottlenecks are the bane

Nasscom is not pushing for any fresh concessions Nevertheless, it has demanded
the removal of certain procedural bottlenecks to increase growth in the Indian
software and services industry. In order to sustain growth and achieve revenues
of $87 billion by 2008, industry has suggested that there should be no fresh
imposition of tax on the sector and the present incentives are continued on a
long-term basis. The association has also demanded that the government should
take initiatives to make India an attractive IT destination by opening more STPs,
enhancing telecom infrastructure, reducing the cost of computerization, setting
up more IITs and similar institutions and sops for e-commerce in the country.

Another recommendation by Nasscom pertains to the anomaly in Income Tax Act
that exempts profits booked by overseas branch offices from assignments abroad
but does not allow similar benefits to overseas subsidiaries for similar
operations. Demanding that the anomaly needs to be corrected immediately, the
association has recommended that dividends from overseas subsidiary companies be
exempted from tax. The software and services industry also wants the government
to address the issue of physical bonding by Customs. As per the current Exim
Policy and Customs notifications, all units in EOU/EPZ/ STP are physically
bonded in the sense that equipment in these units cannot be taken out without
prior permission of competent authority. The association has demanded removal of
this clause to avoid unnecessary procedural delays. The association has also
recommended allocation of resources for enhancement of infrastructure like
airports and power at the major software cities of India and a minimum of 2 Gbps
of national Internet bandwidth.

Shubhendu Parth in New Delhi With
inputs from Dhanya Krishnakumar

Hard-ware Times

Much as IT minister Pramod Mahajan admits, it is hardware that needs a shot
in the arm now...

Kiran Karnik president, Nasscom

There are no major demands or wishlists from Nasscom as the government and the
IT and communications ministry has extended all possible support. All we want is
that there should good infrastructure in place such as roads, power etc so that
more companies invest in this part of the world.

Ganesh Natarajan deputy chairman & MD, Zensar Technologies

There should be a boost for domestic consumption of IT. We must be able to
expect a clear agenda for e-Governance and software in government establishments
and also some tax relief on significant investment in IT even by the private
sector. There should be creation of more departments of high quality for
developing Microelectronics and System Software graduates within the existing
RECs and MCA Institutions.

Arun Kumar president & MD, Hughes Software Systems

The software industry has secured adequate support from the government in terms
of fiscal incentives and favorable policy changes. What the government needs to
do now is consider benefits for the hardware industry.

Anand Ekbote managing director, Emerson Network Power (India)

Investments should be encouraged in Internet infrastructure (Broadband, IDC’s,
convergence). It should enable increase IT penetration and recognize hardware
industry as essential for software growth, not as a poor cousin.

Jerry Rao chairman & CEO, MphasiS BFL

Sub sections 10A (9) & 10B (9) should be altogether deleted. Alternatively,
these sub sections should be amended to specifically exclude demergers and
amalgamations from the provisions similar to Section 80-Ia (12).

Nandan Nilekani managing director & COO, Infosys

Companies operating under the STP scheme should be allowed to operate without
the requirement of customs bonding. And they should be allowed to import duty
free goods without prior approval from government agencies. Indian software
companies should be allowed to maintain their surplus funds in the EEFC account
up to the limit they are entitled to make overseas acquisitions and to support
their various needs abroad like payment of maintenance allowance to employees,
marketing office expenses etc. The government should remove anomalies in tax
laws for the software sector. The Central Board of Direct Taxes should notify
that payments made to international service providers who provide bandwidth
outside India and who do not have a permanent establishment in India should not
be subject to withholding tax in India on the payments made to them.

Ashank Desai CMD, Mastek

The fiscal deficit should be contained below 5%. There should be increased
outlay on infrastructure, particularly power, roads, and telecom infrastructure.
This will not only facilitate new investments but will ensure competitive
position of Indian players.

Ajai Chowdhry chairman & CEO, HCL Infosystems

The hardware industry has been neglected for a long time. High duty rates and
higher prices have resulted in low penetration. Apart from reducing the duties,
the government should increase its spending on IT to give a boost to the
industry. With a vast pool of qualified, English speaking manpower, there is no
reason why India can not become the World’s Back Office. More computers will
enhance productivity levels and add to GDP. Consequently software development
costs will also come down. Besides providing sops to lower the PC prices, the
government should make policies to encourage manufacturing of IT products. Here
we can take a lesson from China, who have worked very successfully to overcome
almost similar challenges and the results are there for everyone to see.
Similarly, Internet telephony would become a major catalyst in driving up the
Internet penetration.

Uday Birje country manger, Enterasys Networks

As a first step towards bringing the feel good factor back to the industry, the
government should bring IT spending on products and services for various
ministries and departments under its jurisdiction. In addition, it should
announce a specific hardware policy by accepting the expert committee reports on
the IT hardware sector.

Pramod Khera CEO, Aptech

The single most important step that the government can take is to announce
specific amounts of investments in IT in the government departments, PSUs, and
Govt. Corporations, with deadlines for implementation. This will give a big
boost to the IT industry in India and strengthen the domestic base of the
industry which is crucial if we have to maintain the growth rates.

Dr V Chandrasekaran chairman and CEO, PentaMedia

The duties connected to digital industry (computers and accessories) should be
brought down to 5%. Digital entertainment should be given a separate identity
like that of IT and Communications. And, all benefits applicable to IT and
communication should be extended. These will make our policies realistic and
will graduate us into ICE (information, communication and entertainment) and TMC
(technology, media, communication).

Sanjeev Aggarwal CEO, Daksh eServices

The IT services sector is indeed very for-tunate in the ability to import
equipment at zero duty and the fact that our income is tax exempt till 2010. We
would expect this budget to continue the same spirit in the year to come too.

Javed Tapia director, Red Hat India

Most importantly the government must go ahead with its stated objective of
spending 3% of budgets on IT. Also the entire e-governance initiative should
pick up steam with an increased participation from the private sector. The
spending by the government will be the single largest reason for a revival in
the sentiment of the IT industry. The other important issue concerning most IT
companies is the possibility of bringing IT under the service tax net.

Shekhar Dasgupta country manager, Oracle India

If the government starts spending it’s allocated 3% of its annual budget for
e-governance and e-learning projects, it will provide the fillip to the IT
industry. It will also bring about an ethos of IT culture and a modern outlook
that will have an extremely positive cascading effect across the entire economy
and society.

Lakshmi Narayanan president & COO, Cognizant Technology Solutions

First and foremost, we must speed up the "reforms process." Only this
will create the right growth environment. By increasing FDI inflows and opening
up the market so that our competitiveness improves our industry can act as the
global source in certain key areas. We need to get as much FDI inflows as China
is receiving now.

Harsh Roongta CEO, Apnaloan India

The government should look at the duty structure on the entire
telecom/technology (both hardware and software) structure to bring down the
capital costs for the entire IT industry in India. Also, it needs to implement
the telecom reforms fully, which will give a fillip to the IT enabled services
sector. The government should announce a specific time frame for implementing
the e-governance program.

PG Kamath vice-president (marketing), Ingram Micro India

CVD on imports must come down from the current level of 16% to 8% and Special
Additional Duty (SAD) must be removed. Both these will assist in bringing down
costs on IT products & bring back the much needed buoyancy in terms of
consumer & corporate demand for these products. Revenue loss to the
exchequer, on this count, can be more than offset from the additional excise
& tax revenues from the incremental sales that will accrue.

Vishnu Dusad MD, Nucleus Software Exports

We have to realize that our competing nation has been working on long term
strategy. Incentives in terms of subsidies should be given to the R&D
sector. This will encourage investment in this area without any additional
burden on the exchequer. In fact, the subsidization must be also be given for
any exports of R&D work that has been done by all the research labs of CSIR.