9th June 1998

1.1 Definition of 'IT Software'

In the present customs notification, "Computer Software" is entitled for zero customs duty. However, the Explanation attached to the relevant Customs notification No. 3/98-Customs dated 11th February, 1998, that is to be used by the field formations of the Customs for determining the software for availing zero duty has resulted in problems related to the interpretation of the expression "Computer Software".

At present, the expression "Computer Software" has been interpreted to exclude the software that may be used for a specific function in an application area other than the computer field. As a result of this interpretation, the software for specific application areas such as Telecommunications ( e.g., the Billing Software) is not classified as "Computer Software". The basic reason for such an interpretation is that, in such cases, vendors may tend to redistribute the price of the Hardware and the Software in such a manner as to take undue advantage of the zero duty on software.

It is recommended that the following definition based on international definition HS-96(85.24) may be adopted for the term 'IT Software' :

"IT Software" means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of an automatic data processing machine falling under heading 'IT Products', but does not include 'Non-IT Products".

Finance Ministry (CBEC) shall introduce a new classification called, 'Information Technology (IT) Products' including Computer, Telecommunication and Broadcasting products, by recognising the technological convergence of these three categories, in line with WTO (ITA) Agreement.

1.2 Duty Reduction Schedule: Commitment to WTO

At present there is zero import duty on all kinds of Computer Software. According to commitment given to WTO in 1996, India will reduce custom duty trade barrier to zero for 94 items by 1 January 2000, and all other IT items by 1 January 2005 (except a few items by 1st January 2003).

In the background of the declaration of the Prime Minister that India will be transformed into an IT superpower within 10 years, the above commitments have to be revised to come in line with the deadline of 1st January 2002 set by WTO. Accordingly, the following revised schedule is suggested along with action guidelines:

i) Issuance of a notification and informing WTO and the primary signatory countries about India completely acceeding to the Ministerial Declaration of 13 December 1996 with amendments thereof.

ii) The notification shall rescind modified position signed by India subsequent to this date. As the present proposal is more in conformity with the Declaration, WTO and the primary signatory countries will accept it without any reservation.

iii) To make up for the lost time and keeping in view India's stake in Software export, the Government has to do somewhat better than what was expected of India on 13th December 1996. This can be carried out by announcing the following new schedule:

Attachment A, Section I:

(a) The 94 items in the list:

3818, 8469-11 to 8531-90,
8542 to 8544-70,
9030-40
By 1 January 1999

(b) Other items in the above list:

By 1 January 2000/1

(c) 8532 to 8541

9009-11 to 9027-90
By 1 January 2002

(d) Attachment A, Section-II:

All by 1 January 1999

1.3 Duty on Compact Disc or other Optical Disc Media with content

There should be no customs duty on import of CD-ROMs and even floppies containing text/content . This is similar to the case of import of books.

1.4 Duty Exemption for gifting bonded computer

(i) Imported PCs can be taken out of bonded offices after a period of 10 years or after declaring them technically obsolete if these are gifted to recognised Schools, Colleges, Libraries, R&D Establishments, Government organisations and Registered Charitable hospitals.

(ii) Donation of Computers: DGFT had made provision under para 9.19 (b) of the Hand Book of Procedures for Electronic Units under EOU/EPZ/STP/EHTP Schemes to donate computers free of duty to Government organisations, educational institutions and registered charitable hospitals, two years after their import and use. The corresponding notification of Department of Revenue has not yet been issued. This needs to be implemented expeditiously.

1.5 Bonding and Inspection

(i) Computer software should be allowed to be imported through registered courier without any upper value limit.

(ii) Software companies shall be exempted from inspection by Inspectors like those for Factory, Boiler, Excise, Labour, etc., as they employ only highly qualified white collar workers.

(iii) Removal of Physical bonding: According to para 9.18 of Hand Book of Procedures entire operations of EOU/EPZ/STP/EHTP Units shall be in a customs bonded factory, unless otherwise specifically exempted from physical bonding. The bonding is for five years as per the existing EXIM Policy.

The requirement of bonding has its own implications in terms of the cost and the speedy clearance of goods for exports. Reduction of costs through reduction in delay and speedy response to the changing market environment is a pre-requisite in IT and software industry. It is felt that the physical control should be replaced by fiscal controls. The information system under these Schemes should be so devised that whatever is imported/procured locally for use in the bonded premises should get logged in the computer without need for physical bonding. The export Obligation/Performance should be judged from the available data.

1.6 Shipment related issues.

a) Export shipment time to be restricted to less than 24 hours.

In the Export Promotion Board it had been decided that the export shipment time for air cargo shall be reduced to less than 24 hours. Effective steps for implementation of this decision need to be taken.

b) Concept of "Known Shipper" to be introduced.

In the EPB meeting it had been decided that the concept of "Known Shipper" will be introduced to avoid delays on account of cooling off period. The decision is to be implemented by Ministry of Civil Aviation.

c) Consolidation of export cargo by Air.

In order to give competitive edge, the consolidation of export cargo needs to be facilitated. Cargo companies and other associated agencies should be encouraged to allow consolidation of export air cargo. Ministry of Civil Aviation is required to give urgent attention to this issue.