New Delhi: In a pre-budget memorandum on direct and indirect taxes submitted to the ministry of Finance, Nasscom has highlighted the top five most critical issues that they hope will get addressed in the Union Budget 2008
1. Continuation of STPI Scheme beyond 2009
• Continue STP scheme and tax incentive under section 10A/10B for next 10 years
• Remove STP tax holiday for IT sector (not BPO) and link to signing of totalization agreement with US government. This was recommended by the Kelkar Committee too. It is a substantial cost for the industry and puts Indian IT companies at a competitive disadvantage as compared to global peers
2. Broaden eligibility criteria for Large Taxpayer Unit (LTU) scheme: Current eligibility criteria is restrictive and several large IT companies employing more than 10,000 people and facilitating tax collections of several hundred crores in TDS, Fringe Benefit Tax, Input service tax customs etc. are not entitled to join the scheme
3. Foreign Tax Credits: Relevant provisions are incorporated in the domestic law to provide a mechanism for allowing full tax credit. It is recommended to Advance Pricing Agreements (APA) to provide upfront tax certainty.
4. Advance Pricing Agreements (APA) to provide upfront tax certainty:
• Similar to existing mechanism for issuing advance rulings to provide certainty on issues of tax interpretation and principles, the setting up of a mechanism for advance pricing agreements on transfer pricing issues is imperative. This will provide much needed tax certainty and avoid protracted litigation against transfer pricing adjustments at the field level. US, Canada and Mexico; almost every European country; China, Taiwan, Korea, Japan, Australia have already included this as part of their tax legislations
• Provide government an opportunity to review and analyse all business facts, risks and circumstances upfront rather than waiting for 4-5 years by the time assessment of tax return is started.
• Include such an APA mechanism in the next Indian budget and provide resources to new APA office to allow them to process required rulings
5. Refund of service tax paid on services utilized for export of computer software and BPO services:
• Service tax on input services consumed in software and BPO business amounts to around 3% of business cost, which is a significant number when Indian companies have to compete in international market
• Denial of service tax refunds to software exporters on the ground that software is exempt from service tax is not justified since export of even taxable services anyway is exempt
• No refunds granted even to BPO service exporters on technical/practical interpretations and litigative approach
• Parity to be maintained between export of goods and services and also between services (taxable or non-taxable)
• Field should be instructed to grant refund of input service tax used for export of non taxable services
• Many countries like UK, Ireland, China, Singapore etc have a provision for refund of input taxes
Other Recommendations include
• 100% tax holiday benefits for units in SEZ: Aligning the provisions of Section 10AA
• Deduction of Tax at Source from payment to Non- Resident under section 195
• Rationalisation of transfer pricing rules
• Consolidated tax return
• Update and expand list of Specified Services: Include the service of “renting of immovable property” in the list of Specified Services to allow full tax credit and also that effective mechanism shall be put in place to periodically review and update list of specified services
• Carve out a separate category of services called “Information Technology Services” and remove IT services fro m all other headings.
• Administration of Service Tax only through registered authority
• Clarify the scope of Manpower Recruitment or Supply Agency’s services” to exclude services which are essentially “technical assistance in the discipline of computer software engineering”.
• Clarify that software maintenance is “technical assistance in the discipline of computer software engineering”
• Align service tax exemption available to SEZ unit / developer to units in STPI/EOU
• Notify IT / ITES industry as a class of category of persons eligible to make an application for Advance Ruling under Section 96(1)