Zero Duty, Zero Thought

Prasanto
K Roy

As we worked on this Financials volume of the four-part DQ Top 20 series,
other financials played out in the market. The year 2004 saw two Union Budgets:
a pre-election January mini-Budget from the former NDA, and a ‘main’ Budget
from the new government in July, which announced ‘zero excise duty’ for the
PC.

The subsequent fracas highlights several things.

First, complexity. Everyone from MAIT to the vendors was prompt to welcome
the Budget; vendors announced PC price cuts, and ‘after reading the fine print’,
withdrew them. And worried about a market flooded with Chinese, or Dell, PCs.

Second, good intent (forget the uncharitable view about some hidden agenda
for a single company). So what if the road to hell is paved with good
intentions. Zero duty sounds like a good thing for prices. And the ‘WTO zero’
regime is a year away.

Third, a casual approach to domestic IT. Those tech-savvy economists forgot
that a major duty cut helps when the item is actually being imported and not
largely made locally-you need to factor in the large manufacturing base that
has been set up in India by most PC vendors. And they reduced duty on a finished
product and left the inputs at much higher duty.

Fourth, the lower visibility of the domestic IT market-such a mess would
have been unlikely with services exports. There’d be early warnings and
lobbying. Such as before the January Budget clarification that tech services
companies would continue to enjoy Section 10A/10B benefits after M&As.



For those who came in late: The NDA’s January mini-Budget reduced Excise
duty on PCs from 16% to 8%, and scrapped the 4% SAD across. The July Budget
dropped Excise on PCs to zero. It did not touch peripherals, even PC parts like
monitors and drives. Only one key vendor, importer Dell, managed real price
cuts. Vendors also realized that the 16% CVD (countervailing duty) was still
around.

At end-July, after representations via MAIT and other channels, came the
level-playing-field additional duty for PC imports (equivalent to that paid on
input parts and peripherals by local PC makers): 7% for a full PC system, 6%
sans monitor. Excise/CVD on inputs continued at 16%; Customs duty was scrapped
on cabinets, key-switches, etc, and on SMPSs (though the latter are made in
India).

And the industry went about its business again, and PC prices went back up to
pre-Budget levels. After a three-week-long glitch at the core of Indian IT-the
PC market-and avoidable confusion about the future of manufacturing.

This goes to show that we have some way to go for the domestic IT market and
its players to become visible and influential in India. The market’s recovery
in 2003-04, and that its slice of the total $20 billion Indian IT industry pie
did not shrink (for the first time in ten years) were good steps in that
direction.

Prasanto K Roy

Leave a Reply

Your email address will not be published. Required fields are marked *