The Hindu Business Line : Industry sees 10 pc fall in PC prices from April — Opinion divided on VAT impact on domestic units

THERE is good news ahead for those planning to buy PCs. With zero duty regime under the IT agreement scheduled to come into effect from March 2005 onwards, the prices of computers - both imported and locally manufactured systems - are likely to fall.

PC maker Zenith foresees a price reduction of 6-7 per cent, while a section of industry anticipates a price cut of about 10 per cent for an imported machine and 4-5 per cent for `made-in-India' computers.

While the hardware industry is convinced that the regime will trigger PC price cuts, players are divided on the issue of impact of the zero duty era on cost-competitiveness of local manufacturing.

Currently, manufacturing/assembling is the most favoured recourse by PC majors - with the exception of Dell - as it offers benefits such as duty differential and proximity to the local market. Under a new regime, will the market dynamics change?

"In a few weeks, on account of customs duty alone, the price drops on imported PCs could be higher than for a system manufactured here. This may tilt the scales in favour of imports," an analyst said.

His reasoning: while the existing 10 per cent import duty on finished goods is expected to go with the implementation of zero duty regime, the same degree of benefit is unlikely to accrue to PC manufacturers as import duty on a majority of components that go into a system, including hard disks, floppy and CD drives, microprocessors and electro-mechanical components, is already nil.

"There are some components like motherboard that currently attract a 10 per cent duty, but removal of this duty will translate into a price reduction of only 4-5 per cent on the overall computer," he added.

Moreover, the analyst anticipates that VAT, which will replace the current levy of sales tax, would be applicable on domestically manufactured PCs but not on PC that are imported and sold directly to customers, adding to the domestic industry's woes.

The same is true of sales tax today. But till now the domestic players could take the disadvantages accruing from sales tax imposition in their stride as there was a 10 per cent protection in the form of customs duty on finished goods. Now with customs duty being abolished, the disadvantage will stare them in their faces, he said.

It is perhaps this fear that prompted hardware association, MAIT, to seek an "import VAT" on finished imported products.

However, players like Zenith and Acer are convinced that local manufacturing would continue to retain its edge.

According to Mr Raj Saraf, Chairman of Mumbai-based Zenith Computers, the zero duty regime would not trigger any new advantage or disadvantage for the players.

"The duty levels on finished product as well as on inputs and components are at a similar level, about 17 per cent. Its removal will not change the situation," he added, but warned that problems could arise if duty on finished goods becomes nil while components continue to attract levies like excise duty.

Mr Saraf admitted that the proposed imposition of VAT on locally manufactured goods was "a matter of concern".

Reflecting the IT industry's state of preparedness to meet the challenge of the new regime, Mr S. Rajendran, General Manager (Sales and Marketing), Consumer Product Group, Acer, said that in an era of zero duty, manufacturers will have the advantage of importing parts and then manufacturing computers to sell them locally, which are currently chargeable at zero excise.

If the same continues, computer manufacturers in India would be at an advantage unless the additional duty is withdrawn or excise duty levied on manufacture of PCs, he added.

Mr Santanu Ghosh, Director of the Bengal-based Xenitis Infotech, said: "Local manufacturers will still be able to offer better prices in the market even after zero duty and VAT, as the cost of production, freight and clearing charges will also play a major role in enhancing the cost of imported products."

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