In his budget speech, finance minister Yashwant Sinha had announced that all Y2K-related expenditure would be treated as revenue expenditure. The announcement was widely hailed by the computer hardware industry as a manna from heaven even though the rest of the budget offered little succor for the ailing industry.

It implied 100 per cent depreciation benefit being extended to those enterprises keen to undertake replacement of non-Y2K compliant systems.The industry has been rooting for full depreciation on hardware, but the demand did not meet with favour by the government. The depreciation benefit was extended from 25 per cent to 60 per cent last July upon the national IT task force recommendation.

Hence, hardware manufacturers were happy that at least Y2K-related expenditure had been allowed full tax exemption.However, the fresh spoke in the wheel came with the Central Board of Direct Taxes objecting to the move on the grounds that it was bound to lead to misuse of the concession.

The new revenue department notification last week restricts the benefit only to expenditure related to modifications in the existing non-Y2K compliant systems, whereas fresh purchases would be treated for depreciation at the existing 60 per cent rate.

"Since the preparedness in the country today to meet the Y2K challenge is alarmingly low, the concession was perceived as a major motivator that would induce people to take corrective actions and also replace those systems which cannot be made compliant by fresh purchases," said Manufacturers Association of Information Technology director Vinnie Mehta.

A very large number of non-Y2K compliant systems need replacement on a mass scale, specially old PCs and legacy systems. Industry is of the view that while corporates might still replace the mission critical servers and mainframes, theymay feel less inclined to replace PCs and peripherals and merely modify them.

"Due to this volte face by the government, there will be no mass scale replacements and we will enter the new century with old systems. After all, purchase of a small card, or a BIOS software to solve the problem on existing systems does not call for a concession," pointed out HCL Infosystems general manager marketing Sharad Talwar.

"Thus, the problem of Y2K preparedness of the country will continue to remain unaddressed to a large extent. This could be disastrous, particularly for networks in sectors like insurance and power. Somebody must realise that we are sitting on a time bomb worse than Kargil," he added.

Hardware companies like HCL and Wipro estimate that 20 to 25 per cent of their hardware sale during the current fiscal will cater to the replacement market, irrespective of the depreciation benefit.