The IT / ITeS sector has grown phenomenally over the past decade and is a key contributor to the Indian economy today. With Union Budget 2008 around the corner, players in the IT/ ITeS sector have some focussed expectations.
Geeta Tolia and Tabrez Hanif of Grant Thornton India
Though overall the expectation is that infrastructure and agriculture, closely followed by education, will receive special attention from the Finance Ministry, a strong undercurrent prevails that IT is a sector to reckon with and will, in due course, regain its much talked about star status.
Of late IT/ ITeS companies and IT industry associations have been raising a hue and cry, seeking the extension of direct tax benefits to the Software Technology Park of India (‘STPI’) units. Barring some companies, which are of the view that the tax benefits will not be extended, several others believe that given the practical difficulties, stringent norms and level of unpreparedness of the Special Economic Zones (‘SEZ’); the tax holiday would be extended with some cutback in the existing concessions.
Another bone of contention has been the transfer pricing (TP) norms and the inconsistency in parameters considered for adjustments. The proposed Advance Pricing Arrangements (APA) are seen as the silver lining in this dark cloud though, and are being eagerly awaited by the IT industry.
The IT industry typically works on a model where an Indian subsidiary is set up by a foreign parent to carry out services such back office, software development and IT/ ITeS. As a result, TP regulations would invariably apply since this would involve related-party international transactions. A lot of issues would have a common thread across the sector, so an APA would help alleviate ambiguity, upward adjustments to the price by the TP officer and similar confusion.
At best, the industry expects some simplification in the TP procedures and a long wait for the APA to take shape and prove to be a boon for the average software developer. Also bear in mind that the law provides for an acceptable variance of 5% between the transaction price and the arm’s length price. But, there are those who believe that the current permissible range of deviation from the arms length norm should be increased from 5% to 10%, since this is typically also the percentage variance accepted internally by companies when evaluating performance with budgets.
It is expected that the corporate taxes will either remain constant or be reduced by a few percentage points (with possible simplification in the current slabs), in order to be comparable within the Asean region. The Finance Minister might even consider abolishing the existing surcharges.
From an indirect tax perspective, it is anticipated that the rates will be brought at par with Asean levels and commitments. Though largely STPI units are unaffected by duties such as customs and central excise, service tax is still required to be paid with ambiguity over refund/ rebate mechanisms. More specifically the service tax now levied on lease rentals of commercial properties is proving to be without any debate to be a huge dampener to the bottom line, adding to companies’ existing woes of the appreciating rupee and impending end to the tax holiday.
On the topic of SEZs, there were some who did perceive this to be detrimental to the health of the STPI scheme (and poor farmers). The other reasons for the negative notions was the lack of provisions for transition of STPI units to SEZ, state of readiness of SEZs today and the relative inflexibility in terms of location.
Certain other items on the wishlist included:
a) Simplification of fringe benefit tax provisions;
b) Increase in tax breaks to salaried individuals;
c) Clarity on provisions governing refund of service tax to software exporters;
d) Withdrawal of minimum alternate tax on STPI units profits; and
e) Cutback of service tax on commercial lease rent.
In conclusion, there is a wide expectation of an extension of the STPI Scheme and the income tax holiday enjoyed thereunder. This would give a boost to the sector especially considering the substantial appreciation of the rupee, the slowdown in the US economy and the consequent impact on the commercial viability of Indian IT/ITeS sector, due to slow down in opportunities.
The effects are already being felt, with some of the IT majors beginning to cut down on their manpower, slowing the hiring process, not being very enthusiastic to take on additional premises. All this has a cascading effect on the economy in general.
Geeta Tolia is partner, tax and regulatory services, Grant Thornton India. Tabrez Hanif is assistant manager, tax and regulatory services, Grant Thornton India