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What the tech sector wants from Budget 2022

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Investments in technology have a multiplier effect on the broader economy, and it becomes imperative that we build the right ecosystem to foster innovation and development in strategic technology areas. It is with this context that we look at some of the tech sector expectations from Union Budget 2022

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In the current environment, COVID-19 has accelerated technology and digital adoption across industries and also heralded hybrid work environments, heavily reliant on technology led solutions.  India has become the digital capability hub of the world with around 75% of global digital talent in the country. The number of internet subscribers in India currently stands at around 750 million, expected to grow to 900 million by 2025. Digital continues to drive growth in domestic as well as export markets. 

Key trends and growth areas include electronics manufacturing services, semiconductor technology and manufacturing, internet services including e-commerce and consumer-oriented services like ed-tech, fintech, etc.

Investments in technology have a multiplier effect on the broader economy, and it becomes imperative that we build the right ecosystem to foster innovation and development in strategic technology areas. It is with this context that we look at some of the industry expectations from Union Budget 2022.

  • Some of the recently introduced digital taxes / levies by the Indian government, being an offshoot of Base Erosion and Profit Shifting (‘BEPS’) initiative, are Equalisation Levy (‘EQL’) and Significant Economic Presence (‘SEP’):
  • The EQL provisions applicable for e-commerce operators have various ambiguities associated with them, such as availability of tax credit of EQL in the home country, scope of the term “digital facility", applicability of EQL on intra-group services, etc. The government should come up with clarifications to dispel these ambiguities.
  • SEP provisions, applicable from 1 April 2021, have evident overlap with EQL provisions. The government should provide clarifications on the expected interplay between these provisions.
  • Further, recently more than 130 countries have agreed to adopt an inclusive framework for taxation of MNCs. The framework has been divided into two measures namely Pillar One and Pillar Two. Based on media reports, India is probably going to adopt Pillar Two. Pillar Two provisions are applicable in case the annual revenue of the group is Euro 750 million or more. However, subject to tax rules (‘STTR’) under Organisation for Economic Co-operation and Development (‘OECD’) Pillar Two provide the source jurisdiction the right to tax payments made to overseas related parties in the nature of royalty / fee for technical services / interest subjected to tax at a lower tax rate, even if the threshold for Pillar Two is not breached. Considering that such transactions may fall within the ambit of OECD Pillar 2 (STTR), even when prescribed thresholds are not met, necessary clarity may be provided in the final Pillar provisions, to avoid confusion.
  • E-commerce players incur heavy Advertisement Marketing and Promotion (‘AMP’) expenses towards promotion of their products. However, the tax authorities have been treating such AMP expenses as ‘brand building’ and capital in nature, even though the benefits of such expenses are short lived. The government should provide necessary clarification on the tax treatment of AMP expenditure, in order to put an end to the litigation.
  • In line with the government’s plan of making India a global data centre hub, the data localization regulations require companies to maintain data of Indian customers in India, giving rise to data centre activities in India. Further, the government is currently working on a data centre policy, which is being circulated for inter-ministerial consultations. Tax authorities have been lately treating such data center operations as activities triggering constitution of Permanent Establishment (‘PE’) in India. Considering that the Indian captive units just maintain data for their foreign counterparts in order to comply with the regulations and such activities do not generate any additional income for their counterparts, the government should provide clarifications on applicability of PE provisions on such operations.
  • As a result of COVID-19, change in Advance Pricing Agreement (‘APA’) terms such as critical assumptions, financial projections, pre-agreed margins etc. may make it unfeasible for taxpayers to continue with the terms agreed in APA. Hence, it is important that relaxations are provided to taxpayers who have executed APA to account for the COVID-19 impact in FY 21-22.
  • Information Technology (‘IT’) / Information Technology Enabled Services (‘ITES’) companies routinely face high pitched transfer pricing assessments. This issue arises partly because safe harbor (SHR) margins have not been notified for IT companies with a turnover of more than INR 200 crores. Further, the view of the industry is that the SHR margins are on the higher side and should be reduced to propagate wider adoption. Addressing this issue will help reduce the quantum of litigation and pending appeals. Further, it is recommended to notify SHR margins for entities with turnover up to INR 1000 cr.
  • Refund of Goods and Services Tax (‘GST’) paid on capital goods used in export/zero-rated supplies is not available under the current GST regime. Growth in domestic manufacture of electronic products and IT equipment would give rise to purchase of capital goods for the purpose of manufacturing. Further, subsequent export of such electronic goods manufactured could restrict refund of GST paid on capital goods used in manufacturing, leading to cash crunch. It is recommended that refund of input tax credit on capital goods be permitted by way of an amendment to the provision.
  • The GST laws restrict input tax credit on works contract and construction services except in cases where such services are provided for construction of plant and machinery or in the same line of business. This causes hardship to companies who consume such goods/services for investment (construction) in own facilities. It also creates a bottleneck for investments towards properties to be used for letting out where rentals are charged at full rate of GST. It is recommended that credit of goods/services acquired in the construction of immovable property be allowed without any restrictions to all such businesses, in one go or in staggered manner.

Prasad KS is Partner; Vijai Jayaram is Director; Rohit Lal is Manager; and Shivangi Gupta is Deputy Manager with Deloitte Haskins & Sells LLP

 

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