India's IT Companies Plead For Tax Cuts As Budget Looms

Mandy Robinson, Tax-news.com, London

27 February 2001

Software developers and computer manufacturers in India say their business growth is becoming increasingly retarded by an unfair tax burden and they are urging the government to reform its taxation rates in the annual budget which is due to take place tomorrow.

R Ramaraj, managing director of Satyam Infoway Ltd, India's second-biggest Internet service provider, stated in the New Dehli press: 'The government can take a number of steps to encourage the growth of the industry. It should reduce import duties on personal computers and on capital equipment for networking and give tax breaks for companies investing in Internet infrastructure.'

It is estimated that the government receives around 8 billion rupees in taxes from its computer manufacturers. The taxation is complex with at least four various taxes levied on computers and their components. Many India-based computer manufacturers have campaigned for import duty to be lowered to 10 per cent and the abolition of the 4 per cent special additional duty (for parts not made in India) and the sales tax, which can be anywhere between 4-10 per cent, on their goods.

The companies are asking for the same status as India's software manufacturers who, in comparison, get a good deal as they do not pay any tax on exports and do not incur a sales tax on their products. Director of the Manufacturers' Association of Information Technology, Vinnie Mehta, said: 'In the best possible scenario, we will be able to bring down prices of computers by as much as 25 per cent.' In agreement with this is Dewang Mehta, president of the National Association of Software Service Companies (NASSCOM), who said: 'The government should refrain from imposing new unnecessary regulations, or taxes and tariffs on commercial activities that take place on the Internet.'

However, much to the dismay of most IT companies, many analysts are of the opinion that the government may impose a service tax on Internet service providers and software exporters and it could be as much as 5 per cent. Mr Ramaraj explained: 'Internet companies are still in a stage of investing in developing the infrastructure and market and are yet to get any returns. The levy of a service tax will only hamper the growth of Internet access.'

The Indian government is under pressure to boost its income, with an estimated financial deficit of 5.1 per cent of the country's GDP. It is unlikely that the government will have any plans for tax cuts - disasters such as last month's earthquake in Gujurat may set the country back years in terms of debt. Speculation that the budget will introduce a system of taxing transactions performed over the Internet in an attempt to extract more cash is widespread. It might bring in some much needed revenue for the state, but such a measure can only be bad for the IT industry.

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