By Naveen Aggarwal
As the Government presents its first full-blown budget, on the back of a strong electoral mandate, the mood of Corporate India is upbeat and expectations are sky high. Traditionally, the IT/ITeS sector has been at the forefront of the Indian growth story and has been a key sector driving the services sector’s growth. The sector is again set to play a pivotal role in the major initiatives announced by the Prime Minister like ‘Digital India’ and ‘Make in India’. These initiatives have created lot of interest amongst Indian and foreign investors and may prove instrumental in restoring their confidence in India’s growth. Initiatives like ‘Digital India’ can be a success, only if the Government works in sync with technology companies for effective implementation of the programme. Similarly, to promote the ‘Make in India’ campaign, appropriate fiscal incentives for adoption of IT infrastructure in manufacturing could be considered which could also create opportunities for the IT sector.E-commerce and start-ups are more recent entrants to this industry which are looking for support from the Government to contribute to the growth of India.
On the direct tax front, removal of MAT on SEZ units has been one of the long standing demands of the industry. As an alternative, the Government may consider a phased removal of MAT on SEZ units to aid corporates to reduce their effective tax rate.
Though, the Government has aptly recognized skill development as an engine for economic growth, the industry expects that weighted tax break be extended to the IT/ITeS sector, to incentivise training and skill development.
Permanent establishment issues faced by foreign companies seconding employees to India, continues to be a vexed issue for the IT/ITeS sector, having a large expatriate population in India. The recent High Court and Tribunal rulings have sparked off further debate on this ongoing controversy and the Budget may lend some directional clarity to put this debate to rest.
On the transfer pricing front, the sector still awaits the outcome on the first set of APAs. This should settle,to some extent, theissue of arbitrary mark-up adjustment being done by tax authorities. While last year’s budget brought positive changes to the transfer pricing arena, the industry expects the Government to operationalise amendments like; APA rollback provisions, use of multiple year data and inter-quartile range, which would help in providing clarity and reducing litigation.
The IT/ITeS sector is also plagued with several indirect tax issues which the industry expects the Government to address in this Budget. The ambiguity on treatment of packaged software as ‘goods’ or ‘services’, resulting in levy of both VAT and service tax has been a sore thumb for the industry. One hopes that this Budget will lend clarity on this issue from a service tax perspective.
To align with the manufacturing sector, the industry expects that the exemption limit for applicability of service tax should be upwardly revised from the existing INR10 lakh. Upfront exemption from service tax on services provided to STPI units should be introduced to avoid funds getting blocked in outstanding refunds. The Government should also consider introducing a duty drawback scheme for service export in line with goods to eliminate refunds and simplify processes.The existing cap of INR10 crore as mandatory pre-deposit of taxes while filing appeals should be reduced for SMEs since the value of tax/duty demand would be much lower.
The Government’s attempt to provide clarity on issues such as manpower transfer between tax holiday units and the decision of not challenging the share valuation ruling before the Apex court, somewhere underlines its intention to propagate certainty in tax matters. However, more tangible actions are required, keeping the long-term perspective in mind. The upcoming Budget provides the Government an excellent platform to announce required policy and fiscal measures to facilitate the next phase of growth of this industry.
(The author is Partner and North India Tax Head at KPMG in India)
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Updated Date: Feb 24, 2015 12:10:23 IST