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June 15, 1998


HCL Infosystems

Christmas in July: Finance Minister Yashwant Sinha plays Santa for the IT industry as he unveils the Finance Bill in Parliament.Christmas in July: Finance Minister Yashwant Sinha plays Santa for the IT industry as he unveils the Finance Bill in Parliament.

Priya Ganapati in Bombay

Email this story to a friend. As Finance Minister Yashwant Sinha today moved the Finance Bill (No. 2) in the Lok Sabha, one item after another on the IT industry's wish list were granted.

The National Taskforce on Information Technology and Software Development's Member-Convenor N Seshagiri was exhilarated.

He told Rediff "I would say a good lot of our recommendations have been accepted. I put the entire report on the Web just a week back and now you can see that most of those recommendations have been accepted. Never before have things happened at this electronic speed."

Girish Paranjpe, group vice-president (finance), Wipro, was pleasantly surprised. "One must acknowledge that the government has moved very fast. The good news is that they have put the recommendations of the Taskforce on priority, at least some of those with financial implications," he told this reporter, when contacted.

Sinha announced that

  • computers will not attract gift tax;
  • all information technology products can be depreciated at the rate of 60 per cent per annum;
  • the definition of 'software' in Section 80 HHE of the Income Tax Act has been expanded to include digital/data communication and broadcasting products;
  • 'withholding tax' (or tax deducted at source) on interest on external commercial borrowings in the IT sector is to go;
  • all software used in the IT sector will be exempted from customs duties;
  • and computers and peripherals imported under 100 per cent EOU, EPZ, STP, EHTP schemes would be exempted from customs duties when donated to recognised charitable institutions after use for two years from the date of import;

Seshagiri felt that those recommendations of the Taskforce that have not been covered would see some action soon. "Most of our recommendations on banking have been accepted. The Companies Act will also be amended. Recommendations related to working capital, which would include venture capital, have been accepted. I expect a notification to this effect in about a week," he was optimistic.

However, Vinnie Mehta, deputy director, Manufacturers Association for Information Technology, would "rather remain neutral" on the finance minister's announcements.

"It is still a long way to go for the common man. In every nation, local brands are the leaders. It is very important to nurture the domestic industry, which I do not see happening. I definitely welcome these concessions but we still have a long way to go," he warned.

Sinha promised that the relaxation he announced today would be effective from tomorrow when his ministry issues the relevant notifications.

Gift tax

Seshagiri explained the rationale behind lifting of the gift tax, which his Taskforce had asked for.

"You see, we wanted to make computers prevalent in the country. Suppose there is a philanthropic body or even an industrial tycoon who wants to give away, say 100 computers to a school. Now he would attract zero gift tax as compared to the situation earlier when he had to pay gift tax. Actually, it means that there would be no gift tax for the giver, which could translate into a lot of benefits for schools, colleges and hospitals."

Paranjpe agreed. "It is fairly evident that this has been done to encourage people to give away computers. A computer is an educational tool that can be used to encourage learning. The removal of gift tax would encourage PCs at home and help make people PC literate. It is a good motivation for people to have IT at home."

Higher rate of depreciation for IT products

Kapil Jain, vice-president, marketing, Digital, told Rediff "I think it is a very welcome move. It is very responsive to industry needs. The key thing is change of depreciation rate. This will increase penetration of PCs in several ways. One is that lease rates would come down, increasing accessibility to computing for the SOHO segment (small office home office segment)."

Vinnie Mehta said "Increased depreciation would help motivate people in the IT sector. The useful life of a computer is only two years. If depreciation were 60 per cent, it would mean near zero value of the computer in about two years. This would motivate people to invest in IT. This would also encourage investment in the latest technology, a consequence of which could be donation of older equipment to schools."

Dewang Mehta, executive director, National Association of Software and Service Companies, said "It will not only help increase penetration of computers but will also make computers cheaper as leasing companies would be able to provide computers at cheaper rates."

Paranjpe said "Typically, computers become redundant from a commercial point of view in about two years. Current laws, however, require that if you take it out of a bonded surface you would have to pay some tax on it. Essentially, it means that about 15 square feet of office space is clogged up with tools that are redundant for us. But there are schools clamouring for these machines which are obsolete for us from a commercial point of view but are, otherwise, very good. A higher rate of depreciation would help us invest in new technologies."

Change in definition of 'software'

Seshagiri said, "The entire definition of software as proposed by the Taskforce has been accepted."

The Taskforce definition reads:

(19) (a) Definition: "IT Software" means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of an automatic data processing machine falling under heading 'IT Products', but does not include 'non-IT products'. 'IT service' is defined as any service which results from the use of any IT software over a system of IT products for realising value addition. The term 'IT Industry' shall cover development, production and services related to IT Products. The term 'IT Software' shall be substituted in place of 'Computer Software' in all notifications.

(b) Finance Ministry (CBEC) shall introduce a new classification called, 'Information Technology (IT) Products' including Computer, Digital/Data communication and Digital/Data Broadcasting products, by recognising the progressive technological convergence of these three categories and in line with the classification list in Attachment A (Section I and Section II) of the WTO (ITA) Agreement and, additionally, Data Communication equipment.

Seshagiri said "This has very profound implications. Now, there are no ambiguities left and the scope of IT software has been widened. Ambiguities like that in the definition of 'communications software' have been removed."

He explained that "The definition also includes parts and components. We are giving a major thrust to the hardware industry. We want to make the hardware industry look at billions instead of millions. You should see that all over the world small-scale production in electronics or computers will not work out so we are giving the hardware industry the advantage of scale."

Seshagiri elaborated that "People are using computer networks and utilising a lot of services like email through data communication. Software used for this purpose would have been earlier taxed at 30 per cent. Now they have 0 per cent tax on them. A lot of communication software in use, let us say, VSAT, which utilises software will attract 0 duty."

External commercial borrowing

Paranjpe was glad that "The cost of external commercial borrowing has become cheaper. For you see, ultimately, the cost is being borne by developers. I would put it as a reduction of about 0.5 to 1 per cent in interest costs. For example, if I had to pay 6 per cent interest, then a taxation rate of 10 per cent would effectively work out to around 6.6 per cent, of which I will now deduct 0.6 per cent so that the lender gets a net of 6 per cent."

World Trade Organisation agreement

Finance Minister Yashwant Sinha also announced his intention to "adhere to the new global tariff structure under the World Trade Organisation, two years before it commitment to do so in 2005."

Seshagiri explained that "The WTO (ITA) has 217 items, of which, about 118 items would get advanced to 1999 from 2000. Whatever then remains would be advanced to 2003 from 2005."


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