For creating a congenial ambiance for exporters of IT Software and IT Services (including IT enabled services) to reach the export target of US $ 50 billion by the year 2008, the following incentives shall be provided:

(19) (a) Definition: "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'. 'IT service' is defined as any service which results from the use of any IT software over a system of IT products for realising value addition. The term 'IT Industry' shall cover development, production and services related to IT Products. The term 'IT Software' shall be substituted in place of 'Computer Software' in all notifications.

(b) Finance Ministry (CBEC) shall introduce a new classification called, 'Information Technology (IT) Products' including Computer, Digital/Data communication and Digital/Data Broadcasting products, by recognising the progressive technological convergence of these three categories and in line with the classification list in Attachment A (Section I and Section II) of the WTO (ITA) Agreement and, additionally, Data Communication equipment.

(c) IT Software shall be entitled for zero customs duty and zero excise duty.

(20) A revised Notification giving the following new schedule for the Government of India acceding to the WTO-ITA Ministerial Declaration of 13 December 1996 at Singapore shall be issued by the Ministry of Finance:

In Attachment A, Section I and II of WTO-ITA:

(a) Duty shall be brought down to zero by 1 January 1999 on the following items: Parts & components excluding populated PCBs in HSN 8473.30, all storage devices in HSN 8471.70, ICs above Rs. 1000 in HSN 8542, Stepper Motors in HSN 8501.10, Colour Graphic Display Tube in HSN 8540.40 and Deflective components for Colour monitor in HSN 8504.

(b) Out of the 217 items listed in ITA-I, 94 items which were proposed earlier for zero duty by 1st January 2000 shall now be advanced to 1st January 1999.

(c) The remaining items earlier proposed for zero duty by the 1st January 2003/2004/2005 shall now be advanced to 1 January 2002.

Concomitantly, the following schedule will be adopted:

(d)

• Duty on Capital Goods for the manufacture of items in (c), wherever applicable, becomes zero by 1 January 2000.

• Inputs/raw materials for the manufacture of the items in (c), wherever applicable, becomes zero by 1 January 2001

• Dual purpose items will be taken care of, wherever applicable, by allowing duty drawback benefits or by treating the supplies to the IT industry as deemed export.

• Zero excise duty is concomitant with zero Customs duty with in-phase reduction.

Additionally, other suitable supportive measures shall be taken to encourage Indian hardware industry to become globally competitive in the light of the revised WTO-ITA schedule.

(21) Customs duty on import of CD-ROMs or Optical Disc Media or Magnetic Media containing text , data or multimedia as content shall be charged only on the media and not on the contents.

(22) Imported IT Products shall be permitted to be taken out of bonded offices or out of Electronics/IT Units under EOU/EPZ/STP/EHTP Schemes after a period of 2 years from the date of import if these are donated to recognised educational institutions, Government organisations and registered charitable hospitals, etc., as defined in the Clause 9.19 of the Handbook of Procedures (Volume I) of the EXIM Policy through a customs notification.

(23) IT Software and IT Services companies, being constituents of the knowledge industry, shall be exempted from inspection by Inspectors like those for Factory, Boiler, Excise, Labour, Pollution/Environment etc.,

(24) With technological advancements in Wide Area Computer-Communication networks, which have brought about 'Virtual Technology Parks' in which IT Software and IT services are developed through online integration of software and services subsystems from widely separated locations in the country, the concept of physical bonding has become obsolete. Accordingly, Software developers/exporters are exempted from Customs bonding at various export promotion schemes including STP/EOU/EPZ, etc. The export obligation shall be the same value as given under the EPCG Scheme. Existing bonded units under the various Software Export Promotion schemes will also be considered under the above scheme.

(25) A clarification shall be issued by CBEC that Service Tax is not applicable on computer software development industry.

(26) The Ministry of Civil Aviation shall issue the following notifications/ amendments in the regulations :

• Export shipment time for air cargo will be reduced to less than 24 hours.

• "Known Shipper" will be introduced to avoid delays on account of cooling off period.

• Cargo companies and other associated agencies to allow consolidation of export air cargo.

(27) Section 80 HHE of the Income Tax Act provides for income tax exemption to profits derived from software and services exports. This section shall be amended as follows:

• The existing formula will be so changed that tax on profits shall not have any relation to domestic turnover.

• The definition of software and export turnover will be changed so as to include IT services exports.

• The benefits of this Section for income tax exemption to profits from exports will be extended to supporting IT Software & IT Services developers .

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(28) IT software and IT services shall be deemed as manufacturing activity for the limited purpose of applicability of Section 10 (15) (iv) of the Income Tax Act.

(29) IT Software and IT Services shall be exempted from withholding tax through amendments in the 'explanation' of Section 9 of the Income Tax Act.

(30) For individuals buying IT products including computer, the expenditure shall be deductible under Section 88 of the Income Tax Act.

(31) No gift tax shall be charged for the giver or Income Tax for the receiver on PCs upto Rs. 30,000 of the original purchase price.

(32) For any investment made in IT products and IT software 100 % depreciation shall be allowed in two years for which Ministry of Finance shall take suitable action.

(33) As the traditional method of asset-based funding of working capital would not meet the adequate and timely requirements of fund of the software sector, a differential and flexible approach shall be adopted by giving special dispensation towards working capital requirements of this sector in view of the unique nature of the industry. Accordingly, RBI shall issue, by 15th August 1998, new guidelines with regard to working capital requirements for the IT software and services sector which would be based on simple criteria such as turnover. Banks shall be advised to give 25 percent of the contract value for 18 months, with the first six months as term loan (without collaterals) and from the 7th month onwards annualized Cash Flow Statements shall be accepted instead of collaterals.

(34) IT software and services industry shall be treated as a Priority Sector by banks for the next five years. This would help to meet the requirements of IT software and services exports, and also the IT industry and applications within the country. Major banks will be advised to create specialised IT financing cells in important branches, where IT Software and Services units are sufficiently large in number. Performance in this dimension will be monitored by the Ministry of Finance.

(35) Against the present estimate of Rs. 400 crores of working capital for the industry, the amount shall be increased to around Rs. 1200 crores by the year 2000 subject to the broad criteria of pro-rata increase for the prospective requirements 24 months ahead as compared to the actuals of the current requirements at any given time. As quantitative targeting is not appropriate, a system will be put in place which would enable substantial increase in working capital provided by the banks.

(36) Bank lending to IT Software and Services exporters shall be made eligible for RBI refinancing with sufficiently low interest rates.

(37) The banks shall be allowed to invest in the form of equity in dedicated venture capital funds meant for IT industry as part of the 5 percent of increment in deposits currently allowed for shares.

(38) Banks/FIs like ICICI, IDBI, UTI and SBI shall set up joint ventures with Indian or foreign companies for setting up of at least four different venture capital dedicated funds of a corpus of not less than Rs. 50 crores each to cater to the credit need of the industry. Such venture capitalists may be allowed to set off losses in one invested company and profit in another invested company during the block of years for the purpose of income tax.

(39) The Company's Act shall be amended to facilitate issuance of Sweat Equity to employees. A new definition No. (66) will be added after definition No. (65) in Clause 2 as under:

"(66) Sweat Equity means equity allotted to promoters, Directors or employees for providing any intellectual property or value addition to the Company".

(40) Ministry of Finance shall include IT software and IT service sector while issuing general guidelines for dual listing of companies, as well as while considering two-way fungability for ADRs/GDRs.

(41)

• Dollar Linked Stock Options to employees of Indian Software companies were announced in the 1998 Budget and detailed guidelines on this have been issued by DEA, Ministry of Finance. This shall be modified in accordance with the definition of IT Software and IT Services given under (19)(a) and (b) above.

• Employee Stock option schemes for stock listed in India would also be encouraged. Also, clarification shall be issued that income tax is applicable only at the time of sale and not at the time of excise of option.

(42) Recognising the high velocity of business, high degree of competition and fast technological obsolescence faced by the IT software and IT service exporters, RBI shall be maximally accommodate the following:

(a) A blanket approval for overseas investment for acquisition of software/IT companies across the board for software exporters with previous three years cumulative actual export realisation in excess of US $ 25 million to be given up to 50 % or US $ 25 million, whichever is lower, out of the cumulative actual export earning of the previous three years. This is subject to submission of a certificate of software industry by appropriate authorities.

(b) For FERA approvals beyond this limit, RBI would set up a mechanism for expeditious processing of applications from this sector. This shall be announced by 15 August 1998.

(c) For overseas ventures, a dispensation shall be given for allowing the capitalisation of both goods and services; RBI shall accordingly notify this in consultation with Commerce Ministry by 15 August 1998.

(d) As the present allowable limit of 70% of the contract amount for expenditure abroad does not provide flexibility for utilisation for the purpose of general corporate objectives or for business growth purposes, RBI shall permit IT exporters to freely spend upto 5% of the export proceeds abroad (out of the total 70%) for miscellaneous/sundry purposes to give full flexibility. Also, a new list of allowable expenses under the 70% limit would be worked out by RBI in consultation with NASSCOM.

(e) RBI shall issue revised EEFC guidelines to eliminate restrictions on staggered remittance, second and higher generation subsidiaries and also to allow 20% of the EEFC balances for the use on the following:

i) Advance remittances for downloading software (upto US $ 1 lakh per transaction).

ii) Purchase of equipment and related expenditure

iii) Miscellaneous expenses not detailed in EEFC guidelines (upto 5% ) of EEFC balances. Such EEFC accounts shall be permitted for making payments from offshore branches of Indian banks directly.

(f) Use of International Credit Cards (ICC) abroad for a variety of purposes required by the IT Software and IT Services sector shall be permitted, the detailing of which will be carried out by RBI and notified by 15 August 1998, in particular:

i) All payments currently made under Exchange Earnings Foreign Currency (EEFC) Account shall also be allowed to made through International Credit Cards (ICC). Advance payment for IT software and IT services shall be permitted to be done through ICC for which RBI will issue a notification. Notification shall be issued that ICC may also be used for paying for IT Software and IT services purchased over INTERNET or EXTRANET and also for registering domain names.

ii) RBI shall issue a modified and simplified SOFTEX form required for IT Software and IT Services export by 15 August 1998.

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(43) In the EPCG scheme a system of self-declaration shall be introduced with 100% post-checking subject to punitive penalty for default.

(44) The value limit for import of IT Products including personal computers shall be reduced from Rs. 1.50 lakhs (c.i.f) to Rs. 70,000 (c.i.f).

(45) Private and public organisations providing IT infrastructure shall be included for duty exemption for importing capital goods. Such service providers, in view of such capital goods imported, shall undertake the export obligations as provided for import of capital goods in the EPCG Scheme.

(46) The India Brand Equity Fund Scheme operated by the Ministry of Commerce shall be made available for Software companies with lower interest and longer interval.

(47) On-site IT Services should be made easier by combating Visa regulations of the recipient countries through a planned diplomatic strategy by the Ministry of External Affairs and the Indian Missions abroad for which MEA will create a suitable dedicated structure. This will also include signing of totalisation agreements, wherever necessary so as to maintain the competitive advantage of Indian companies.

(48) Returns from package software development shall be increased by enabling Indian Marketing companies to set up wholesale companies abroad. They shall also be given maximum flexibility in organising the marketing of package software from India through INTERNET.

(49) For benchmarking our country with our emerging competitors, a study shall be conducted at Government cost once in two years by internationally reputed consultancy companies.

(50) Restrictions on the location of IT software and IT Services (including IT training) companies in residential areas shall be removed.

(51) To enable organisations and companies to identify, explore and plan strategies for Large Niche Markets like Y2K and Euro, nationally and corporate wise, all applicable provisions shall be made applicable on higher priority basis. Through MOC and DOE funds 'India Pavilions' shall be set up in several major IT exhibitions around the world through the initiative and coordination of ESC and NASSCOM.

(52) Recognising the catastrophic effect of the Y2K problem for solving which a few hundred billion dollars are being spent around the world, an immediate investment of Rs. 700 crore as corpus funds shall be mobilised to control the crisis in critical Government, Public and Private organisations and services; efforts to sensitise such organisations in the country facing the crisis shall be taken up by the Government immediately including issuance of Government orders for strict compliance in a time bound manner; a High level empowered Task Force with respresentatives from the Government, Industry Associations, Banks and Financial Institutions, Defence Services, Utility and other Public Service organisations, Railways, among others, shall be constituted by the Government of India.

(53)

• 'Mega Web sites' shall be created on INTERNET for promoting marketing and encouraging Indian Software products and packages under multiple initiatives.

• Creation and hosting of websites on servers located in India will be encouraged.

(54) Under DEPB Rupee trade arrangement, IT Software, IT Services and IT product export to Russia shall be permitted with promotional support given by the Electronics and Software Export Promotion Council (ESC), STP, etc.

(55) All promotional and liberalisation policy instruments available to IT Software and IT Services shall be made available to IT enabled services including the Information Content Industry by classifying IT enabled Services as tantamount to IT Software and IT Services.

(56) For promoting Indian Software Packages (system as well as application software) users shall be given fiscal incentives for buying Indian packages. A special screening mechanism will be worked out for identifying the more promising packages developed in India and giving consistent support by the Government as well as the industry for ensuring acceptance in international markets.

(57) Private STPs shall be encouraged to be set up by combining the provisions under (4), (7), (8), (12) , (13), (24), (43), (45), (54) and (55), among others.