The Hindu : High taxes affecting IT penetration: study

Online edition of India's National Newspaper
Tuesday, Dec 02, 2003

Business

Business

High taxes affecting IT penetration: study

By Our Special Correspondent

NEW DELHI DEC. 1. Poor IT penetration will soon start affecting other sectors of the economy and price drops are imperative for growth of the market since the grey market is flourishing on high domestic taxation rates in India, warns a recently compiled study.

India, in order to sustain its growth and remain competitive, needs to accelerate PC penetration with a renewed vigour. India's spending on IT is one sixth of China in terms of percentage of GDP. This has affected the overall penetration of IT in almost all significant sectors of the economy. In the year 2002, less than one lakh PCs were bought by the education segment compared to over eight lakhs in China; less than five lakhs by SMEs compared to over 24 lakh PCs in China and less than seven lakhs by consumers compared to 35 lakhs in China.

"This will not only adversely affect the IT industry but be detrimental to most sectors of the economy. India will be short of 2.35 lakh IT professionals for the IT industry alone by 2008 and it's efforts on e-Governance and better citizen services may come to naught due to poor accessibility of PCs to the citizens,'' observes a study by Skoch Consultancy Services, `Accelerating IT penetration in India to remain competitive.'

India is known to have the highest tax rate in Asia Pacific on PCs at about 35 per cent compared to 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 grey market at 61 per cent, which has no incentive in developing the market but act only as fulfilment agents. The grey market is based on evasion of excise duty, countervailing duty and SAD as these have gone up and commensurately the grey market has also gone up in the same period.

According to the study non-fiscal measures such as switching over to free software have done nothing for reducing consumer prices as 70 per cent of it is already pirated. Similarly, introduction of cheap PCs with low-end configurations have not found favour with the consumer segment with only 12,000 sold in 2003. India specific technologies such as Simputer too have been non-starters so far. A case study on the celebrated People's PC project of Thailand also shows that only 1.5 lakh such PCs were sold against a target of 10 lakhs in spite of prices starting at $250 and full government support.

Six years of Skoch data show 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 bottom line to the extent that it may no longer be sustainable. Further price drops would require help from the Government on reduction of excise duty from current 16 per cent to 8 per cent and an enhancement of depreciation from 60 per cent to 100 per cent. This would result in an inflection point as in the case of mobile phones with grey market going down to only 20 per cent by 2006. It would also spur market growth at 30 per cent plus and bring additional revenue to the Government from the year one itself led by growth in volumes as well as a major part of the grey market coming under the excise net. By 2006 a 26 per cent increase in excise duty collection can be expected. The study recommends that these fiscal measures coupled with removal of SAD or making it MODVAT able is the only way forward for retaining India's competitive advantage.

Skoch Consultancy Services is an IT industry analyst and strategic consultancy firm to several Fortune 500 as well as SME companies worldwide. It also assists western companies looking at business prospects in Asian markets while helping Asian companies to develop themselves as global entities, as a part of its services.

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