Union Budget 03-04: A Mixed Bag

By retaining the full tax exemption under Section 10A/10B in his Union Budget
for 03-04, Finance Minister has sent positive signals to the software industry.
Also, the government’s move to amend the clause in the above section which was
holding back acquisitions and mergers, is a step in the right direction. At the
same time, by not bringing down the excise duty from 16% to 8% on IT products,
Jaswant Singh did not enthuse the hardware segment.

MAIT had proposed this measure to the FM in an effort to increase demand in a
continuing dull market. But MAIT proposed and Jaswant Singh disposed!
Understandably so, because a FM under pressure to meet revenue targets, wouldn’t
have possibly killed the chicken that lay the golden egg.

But, in the bargain, what the FM did not take into cognizance was the fact
that the reduction in excise duty would have brought down prices of PCs at least
by five percent and increased PC penetration. The higher number of sales would
have neutralized the drop in excise duty collections. Let’s hope the change
will happen in the Union Budget for 04-05.

There were high expectations from industry stalwarts that the FM would give a
big boost to hardware manufacturing in the country. No big measures came by.
Instead, what the industry got was a 10 percentage point reduction in the
customs duty on capital goods required for IT/telecom manufacturing.

This was actually a rationalization effort since it was found that the duty
structure of capital goods was not aligned with the finished goods. Finished
goods are in the slab of 15% customs duty for 03-04.

Another rationalization effort was made by removing the excise duty from
pre-loaded software in computers. This was introduced in July 2002 at a time
when no software attracted an excise duty. By removing the excise duty
retrospectively from 2000, the FM has rectified a glaring anomaly. Prices of
PCs, of course, would come down only marginally.

The FM has brought some cheer to the networking segment by reducing customs
duty on fiber optic cable from 45% to 39.2%, and on routers, modems and fixed
wireless terminals from 33.4% to 27.6%. This is a progressive move as it would
help in building up the networking infrastructure at a lower cost.

The Union Budget for 03-04 is sure to have positive rub-offs on the IT
industry because the FM has focused on spending on infrastructural projects,
modernization of ports, and construction of new airports. If the Central
Government can energize all its ministries to spend the budgetary allocations
that have been made to them, then demand for IT products is bound to increase.

Also, with the introduction of VAT from April 1st, there will be greater
application of IT in the administration of a modern tax regime. Here again,
vendors and partners stand to gain as they would contribute in making the tax
system discretion-free and impersonal.

Sylvester Lobo