2003: Terminal year for nil duty regime, accepts MAIT but with conditions

Starting this week, we will bring you the recommendation for the budget 2001-02 by various associations concerning IT industry, national as well as regional. This week we carry the recommendations of Manufacturers' Association for

Information Technology (MAIT) for Budget 2001-02 and EXIM Policy. We would also look at much deeper issues,

which affect the hardware industry and the problems plaguing it. A sneak preview into the journey of MAIT's

recommendations and how it can lend a helping hand to the IT industry as a whole.

Budget Recommendations

One of the key recommendations of MAIT is to have uniform sales tax on all IT products across the

country--recommended rate nil (currently 4 percent), if that's not feasible, then remove the C form. It also proposes to have uniform eight percent excise on all IT/electronic goods from current 16 percent and removal of 10 percent surcharge on import duty on all IT products and removal of four percent SAD.

According to Vinnie Mehta, Director, MAIT, excise and SAD account for over 20 percent of the price of the IT product. He feels that reducing excise to a minimum and abolishing SAD will benefit both Indian and MNC players alike. "If you are getting something worth $ 100, it becomes 116.5 and after four percent tax, it costs $ 121. With 16 percent excise it finally can be bought for $ 141.54. Then depending upon the four or 10 percent it goes up. Why should a customer shell out that extra money."

So one of the key recommendations of MAIT include bringing down the present rate of duty to 10 percent from the current 15 percent on all finished goods. Mehta also believes that the sales tax should be brought to zero. He concedes that ideally sales tax should be abolished completely but if that's not possible then it should be reduced across the entire country without the C form and all the associated forms with it. "Apart from the C form, every state has some two or three sets of other forms which creates a lot of mess."

MAIT also accepts the terminal year for nil duty to be 2003, advocated by WTO provided import duty on all parts and components is immediately brought down to nil or else the terminal year should be 2005 as per the negotiated schedule. It also maintained that duties should be phased out and not be a step function. "As an industry body we would never recommend that duty should be kept consistent till the year 2003. The most logical process would be to phase out the duty. If 15 percent is in this year then in 2001, it should be 10 percent, in 2002, it should be five percent", he elaborated.

Measures for improving IT usage

Sales of IT products to educational institutions should be exempted of all local levies. Secondly, computers/Internet connections/other IT products given to employees should not be considered as taxable income. "Companies like Intel have got funds to give it to their employees in the form of incentives but employees don't want to take it because they have to pay 30 percent tax."

Recommendation for EXIM policy Special Economic Zones (SEZ) for IT hardware

• No NFE positive condition
• All physical controls on the basis of self-declaration

MAIT suggests that peak rate of 15 percent should be maintained if duty on input components is not reduced to nil. Mehta said that the peak rate of duty on all IT products would be brought down to nil by the year 2003. But the problem comes with non-IT parts and components like plastics, metal parts, springs etc, which are called dual usage items. These items have to be imported along with IT products. "If the IT industry is at zero duty regime but some of the input parts and components are not at zero duty, it defies the logic of manufacturing." For this, MAIT recommends that all IT input and components along with the items of dual usage should be brought down to zero duty in this budget.

But this suggestion is tormented with lot of predicaments. Government, in a bid to protect all the sectors, can't bring down the duty on dual usage products to zero. For that, MAIT has proposed Special Economic Zones (SEZs) for IT hardware. SEZs are something like a foreign territory where all the parts and components can be imported or exported at a nil rate of duty. But while selling in the domestic market, both customs and excise duty have to be paid. Mehta accedes, "If we adopt this model for the industry, we would have no problems because all the dual usage items can also come under nil rate of duty."

Apart from this, MAIT has also suggested certain modification in SEZ. SEZ talks about a minimum area of 1,000 hectares. But for IT sector, 1,000 hectare of land would be a waste. MAIT wants the government to reduce this clause. Further, it also proposed that SEZ to be made a unit-based scheme where any unit in any part of country can declare itself SEZ. Presently, SEZ is a zone-based scheme. If any company wants to have a benefit of zero duty regime, it has to move to an SEZ. But physically that is not a feasible option.

While the government refused to do that, MAIT came up with the Electronic Hardware Technology Park (EHTP) scheme in line with SEZ. "With that a unit anywhere in the country can import all its parts and components free of duty and supply to the domestic market with full duty," said Mehta. "This process will not only improve velocity of doing business but it will also simplify the procedures for all exports and imports." He explained that the simplification of the procedure happens by default since duty is paid only once irrespective of the number of products imported.

Self-declaration based clearance

Mehta elucidated that while licensing of software technology, payment is received as a royalty but this royalty is not exempted from corporate tax. That makes a lot of companies shy away from declaring the technology. Instead, they claim that they have exported the software. "People have a way to get around with it but unfortunately nobody comes forward and in the process lose due recognition."

Earlier, when India was importing technology from some other countries, Indian government viewed it as a drain of foreign exchange. That gave way to the withholding tax, which is as high as 20 percent. But now the withholding tax is proving to be a deterrent for companies which are exporting the technology. The tax in case of Japan is 20 percent, USA--15 percent and Germany--10 percent. It just increases the cost of business and neither their government nor ours are interested in tax. Removal of this would help develop the exports of IT technology.