NASSCOM has made its submission for the Union Finance Budget 2012 for consideration of the Government. The focus for NASSCOM’s submission is to create a conducive policy environment that can help sustain and grow the IT-BPO sector in India. Specific suggestions relate to tax related issues, transfer pricing, and support for the SME sector.
Special Economic Zones – Minimum Alternative Tax (MAT)
The SEZ Act was enacted by the Government of India in 2005 to stimulate exports and generate large-scale employment. The most salient incentive has been income tax exemption of export profits which has contributed to the scheme’s success in attracting major investments. However, various policy changes such as replacing the exemption in March 2011 with refund mechanism for input services, and the imposition of the Minimum Alternate Tax (MAT) on SEZ units from AY2012 has diluted the incentive and created deterrent for future growth of SEZs.
NASSCOM’s has recommended that MAT on SEZ income may be withdrawn as it is counter to the long-term policy announced by the Government through the SEZ Act. Alternatively, MAT should be withdrawn at least in respect of SEZs which have already been notified so that economic viability of these SEZs is protected. Moreover, MAT rate should be brought to 1/3rd of the corporate tax rates i.e., to10% (international norms to be applied).
Transfer Pricing Issues
The IT industry has recently been served some unreasonably high assessments based on transfer prices creating issues of litigation for a number of companies. The Finance Minister himself had recognized the salience of transfer pricing issues back in his budget speech of 2009 and indicated the way forward, including “Safe Harbor” provisions, a Dispute Resolution process and the use of Advance Pricing Agreements (APA).
NASSCOM has recommended that a three-pronged approach be taken to expeditiously clear the backlog and provide certainty in the future for transfer pricing issues. Firstly, for past and current claims, “Safe Harbour” provisions will be used to resolve all outstanding cases. Secondly, introduce Advance Pricing Agreements (APA) to help set fair and transparent pricing of transactions and provide certainty to firms in the future. Thirdly, review the structure and procedures of the Dispute Resolution Panel to ensure that the mechanism is effective in achieving its mandated purpose.
Support for SMEs and tier 2/3 cities
With an uncertain and volatile economic environment, small and medium companies in the country are facing an extremely challenging business environment. While the SEZ Act provides for income tax exemption for a defined period, small companies cannot set up in SEZ due to restrictive conditions in this act. This has created a non level playing field wherein smaller companies that need support are unable to access this. As the benefits of Section 10A/10B have ended and DTC has not yet been implemented, a special scheme for supporting SMEs and Tier 2/3 cities is being framed by Department of Information Technology.
NASSCOM has recommended that Department of Information Technology as the nodal ministry for the sector implements a special scheme, wherein small and medium companies can get support either in the form of tax reimbursement or employment linked incentives. Similar provisions should also be applicable for companies that set up operations in Tier 2/3 cities in the country.
For SMEs operating in the domestic market, deduction of 10 percent TDS under section 194J leads to blockage of funds as these companies are most often not profitable or have very low profitability. NASSCOM has recommended that for technical services, rate of deduction of TDS be brought down to 2%.
With growth of the IT sector in India, there has been a substantial increase in the use of legal packaged software and other services which are electronically downloaded. Absence of guidelines and statutory provisions in relation to the taxation of such transactions is leading to uncertain (and inconsistent) tax positions being adopted across multiple jurisdictions.
Specifically, in the context of purchase of standard shrink wrapped software and standard off the shelf software, it is recommended to lay down clearly the position in law, to enable appropriate compliance as well as avoid unwarranted litigation and costs. It is suggested that the guidelines should factor in practices in other advanced economies and the principles enunciated by the OECD to ensure that there is no double taxation, appropriate guidelines would need to be outlined for various e-commerce transactions like database subscription, online software downloads, cloud computing, webhosting and data warehousing, etc.
Service tax refunds: As refund of service tax is getting delayed it is recommended that export activity is exempt from service tax and instead of refunds, a simplified mechanism similar to CENVAT is instituted whereby exemption will be provided to exporters in proportion of their exports to total sales.
Denial of tax deductions for onsite services: With the sunset of STP benefits, there has been denial of tax deductions for onsite services on one pretext or the other, which the exporters of IT services are entitled to. The Government needs to issue appropriate clarifications to state that onsite services are an integral part of IT services.
Dual levies on software: Ambiguity and lack of clarity with regards to treatment of software being ‘goods’ or ‘services’ has resulted in dual taxation (i.e. both Central and State authorities have been demanding taxes on supply of software) leading to additional burden on the industry. It is recommended that all transactions pertaining to supply of software (whether customized or packaged software) should be treated as “services” irrespective of the media and mode of transfer with the assurance from the States that no VAT shall be leviable on software.