The information technology (IT)/IT-enabled services (ITeS) industry has played a key role in putting India on the global map. The Indian IT/ITeS industry is now a $52 billion (Rs2.5 trillion) giant and its contribution to the country’s gross domestic product (GDP) has quadrupled from 1% to 4% in the last decade. However, the industry is plagued with some issues on the taxation front.
Extension of tax holiday to software technology parks (STPs)/export-oriented units
The IT/ITeS industry is eligible for a tax holiday under section 10A/10B of the Income-tax (I-T) Act, the benefit of which is set to expire on 31 March. Considering the global turmoil and its impact on the IT/ITeS industry in India, an extension of this tax holiday by at least three years will provide a major fillip to the industry, especially when the country is witnessing a downward trend in exports.
Tax holiday for units in special economic zones (SEZs)
The formula provided in section 10AA of the I-T Act for computation of deduction available to SEZ units, in most cases, would result in the profits of the SEZ unit not being entitled to the 100% tax holiday as was promised at the time of introduction of the SEZ regime. The government needs to address this anomaly so as to avoid unnecessary litigation.
Fringe benefit tax (FBT)
One of the key FBT issues affecting this industry is that with a large number of employees travelling to and from India on a regular basis, it becomes extremely difficult to ascertain the “employees based in India”, which is a prerequisite for the levy of FBT. Further, a major incentive provided by the IT/ITeS industry to their employees is in the form of employee stock option plans (Esops) and levy of FBT thereon proves to be a major dampener. Considering the major compliance burden cast by FBT on taxpayers and also considering the meagre revenues which FBT contributes to the exchequer, the FBT regime could be given a burial, especially for the IT/ITeS industry and in particular for FBT on Esops. Further, the benefit of lower FBT on conveyance and hotel expenses needs to be extended to the ITeS industry also.
Issues surrounding computation of deduction under section 10A/10B
Plenty of controversies surround the computation of deduction vis-a-vis the set-off of business loss of an STP unit against a non-STP unit and vice versa, adjustment of profits of an STP unit against the losses of another STP unit, adjustment of business loss brought forward against the profits of current year, etc. Despite several tribunal rulings on these issues, the tax office and taxpayers continue to be at loggerheads with each other.
A suitable clarification on the issues outlined above will provide much-needed respite to the industry.
Amid the benefit of the tax holiday enjoyed by the industry, the various tax controversies have played spoilsport. India can well be described as the land of litigation, what with at least 70,000 cases pending before the Income-tax Appellate Tribunal. The several issues described above have only contributed to this perilous situation. The need of the hour is for the government to come out with appropriate amendments/clarifications on these issues. Further, extension of the tax holiday under section 10A/10B would provide a major boost to this industry, enabling India to truly become a global IT superpower.
Himanshu Parekh is executive director and Ashish Agrawal is manager at PricewaterhouseCoopers. Respond to this column at firstname.lastname@example.org