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Revenue dept rejects tax sops for IT hardware
October, 23rd 2006
The policy to boost electronics and IT hardware manufacturing in the country has hit the revenue roadblock. The department has turned down all recommendations for tax sops by the sub-group under the Prime Ministers office task force.

All the recommendations of the group including a five-year tax holiday, tax credit of up to 30% of the investment value, zero per cent customs duty on all capital goods for manufacture of electronic and IT products have not found favour with the revenue department.

In its response to the draft recommendations, the department has said that the current tax regime was moderate and thus there was no justification of extending a tax holiday for five years to any new sector.

The department, on the contrary, wants a review of the existing tax benefits. Further, it said the tax benefits available to export-oriented units, software technology parks will get over by 09 as per the sunset clause and there was no justification of adding a new sector.

On the recommendation for tax credit, the department opined that it resembled investment allowance which was given under the Finance Act of 1976 to compensate for the high inflation of 17-20% during those days. This was withdrawn in 1990.
Moreover, in a low interest rate regime there is no shortage of credit, the department said.

On the sub-group's recommendation seeking enhancement of depreciation for computers from 60% to 100%, depreciation in every three years, the department said the rate of 60% annually was reasonable.

It also rejected the suggestion for removal of withholding tax on fee for transfer of technology saying that the withholding tax (tax deducted at source) was the only effective mode of contemporaneous collection of taxes. In fact, the coverage of TDS has been expanded to ensure prompt collection of taxes and to counter evasion.

The department rejected the recommendation for 0% customs duty on all capital goods and inputs for manufacture of all electronic and IT hardware products saying that such a move could create a problem for the domestic industries which produce these inputs.

Also, it said the policy now was to get away from end-user base exemptions. However, it said if there are raw materials, intermediates and capital goods which are for exclusive use in the industry and do not have any indigenous angle, a lower rate of import duty below the peak rate could be considered.

On the issue of higher incidence of taxation in the country, the department said there was a need to bring them down for the industry in general. But this, it said, would have to be done gradually in keeping with the revenue considerations.

The common goods and service tax with both state and Centre having concurrent but independent jurisdictions on common tax bases is already on the radar. The department said it was not possible to carve out a separate scheme of concessional excise duty on electronic duty as it would not only involve substantial revenue loss but also invite similar requests from other sectors of trade and industry.

Current exemptions on the excise front are already proving to be a drag on the government's excise collections. As the local software sector has already proved its mettle world over, the Prime Minister's office had set up the task force suggest ways and means to boost IT hardware. Member secretary Planning Commission is the chairman of the sub-group.
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