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Duty cuts key to keep the Dragon trailing

New Delhi, Nov. 30: India is likely to lose out to China in information technology if corrective measures related to tax are not implemented by the government.

India’s spending on IT is one-sixth of China in terms of the percentage of gross domestic product (GDP). This has impacted the overall penetration of IT in almost all significant sectors of the economy.

Accelerating IT Penetration in India to Remain Competitive, a report by Skoch Consultancy Services says, “This will not only adversely impact the IT industry, but will be detrimental to most sectors of the economy. This will also lead to a failure of the efforts on e-governance and better citizen services due to poor accessibility of personal computers (PCs) to the citizens (9:1000).”

In order to sustain its growth and remain competitive, India needs to accelerate PC penetration with a renewed vigour, says the report. It also points out that India will be short of 2.35 lakh IT professionals by 2008, which is the minimum requirement for the IT industry alone.

Skoch CEO Sameer Kochhar said, “Since growth in IT investments is found to have a direct correlation with growth in GDP and productivity, it is important for us to take remedial measures and apply correctives with a sense of urgency.”

The study says India is known to have the highest tax rate in Asia-Pacific on PCs at about 35 per cent compared with zero in Malaysia and Hong Kong, 3 per cent in Singapore, 15 per cent in Pakistan and 17 per cent in China. This has led to a flourishing gray market at 61 per cent.

The gray market is based on evasion of excise duty, countervailing duty and special additional duty (SAD) as these have gone up from 13 per cent in 1997 to 20 per cent in 2002. Commensurately, the gray market has gone up from 40 per cent to 61 per cent in the same time period. Customs duty on most components has come down to nearly zero.

In the same period, India has become an exporter of R&D and a net importer of hardware from an exporter of hardware products.

The study says non-fiscal measures like switching over to free software have done nothing to reduce consumer prices as 70 per cent of it is already pirated. Similarly, introduction of cheap PCs with low-end configurations like Simputer have not been successful with only 12,000 sold in 2003.

“Our study shows that there has been a dramatic increase in market growth every time the prices go down significantly and a negative growth whenever the prices have gone up. The prices of PCs have been coming down partially due to industry taking a hit on its bottomline to the extent that it may no longer be sustainable,” said Kochhar.

“Further price drops would require help from the government to reduce excise duty from current 16 per cent to 8 per cent and an enhancement of depreciation from 60 per cent to 100 per cent,” he added. This will result in an inflection point similar to mobile phones with gray market going down to 20 per cent by 2006.

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