Sunila Paul and Ranjeet Rayen

BANGALORE: The government of Karnataka has sent out a circular which brings to effect the 12 per cent luxury tax on electronic products in addition to the four per cent sales tax. This has raised serious concern in the entire IT industry as the government has categorized IT products such as computers, accessories, peripherals and networking products under the electronic goods. According to Manufacturers Association for Information Technology (MAIT), the levy is said to be effective from April 1, 2001 and none of their members have paid the luxury tax to date.

Commenting further, K S Nandakumar, MAIT deputy director – southern region, said, "We were under the impression that the products manufactured by the IT industry were classified as a separate class of goods by the Commercial Taxes Department. The circular justified the classification of these products under electronic goods." According to him, the amount payable by IT vendors would run into crores if this initiative from the Karnataka government comes into effect.

(Source: MAIT)

According to the circular, IT vendors and importers would be liable for luxury tax not only on finished goods that are imported or sold in Karnataka, but also on raw materials and components as there is a notification under the KTEG Act, No. FD 38 CET, dated April 25, 1999. Meanwhile, the state government has also levied sales tax of four per cent on software products. According to MAIT, this makes the total tax structure of a computer with preloaded software to be around 20 per cent.

However, there has been a reduction in the sales tax on UPS from 10 per cent to four per cent, though it remains unclassified under the IT products. Nandakumar also pointed out that UPS and several networking products, including modems are yet to be classified as IT products.

Nandakumar is of the opinion that several companies have shifted their billing operations out of the state, which has resulted in a drop of IT product sales from Karnataka.

MAIT along with Ernest and Young has conducted a survey to study the hardware sector’s growth across the country and will be releasing it soon.