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BENGALURU : The Indian information technology-business process management (IT-BPM) sector, in a pre-budget memorandum, has urged the government to clarify if the place of providing the service will continue to be considered a Special Economic Zone (SEZ) unit even if a worker of the unit has been working remotely.

Under Section 10AA of the Income Tax Act, taxpayers are allowed deductions for businesses which are established in SEZs. Section 10AA(1)(ii) of the IT Act requires a company to transfer part of profits to the SEZ reserve and utilize this for acquiring plant and machinery, which should be used within three years following the year in which the SEZ reserve was created, to claim tax holiday for the third block, which is from year 11–15.

“An aggressive interpretation of Section 10AA could lead to instances where officials may consider that work done remotely by workers of the SEZ unit is ineligible for the tax holiday," according to industry body Nasscom. This explains why it has made this request to the government before the Union budget.

Further, after the outbreak of coronavirus, the industry expects to continue implementing a hybrid work model where, unlike in the past, work will happen both on-site and remotely as a matter of routine. Earlier, this was considered a temporary requirement, but it will now be a regular way of working.

The intention behind mandating creation of SEZ Reserve under Section 10AA was to utilize the money for promotion and development of SEZ units. However, unlike traditional brick and mortar manufacturing businesses, IT-BPM companies do not have significant investments in plant and machinery and instead invest in laptops, desktops, servers, and networking equipment, which do not require heavy capital outlay. Further, because of the change in technology, the requirements of “on premises" assets have reduced and companies are using third-party clouds and infrastructure.

Nasscom has recommended that utilization of the SEZ Reserve should be expanded to include expenses incurred on leasing desktops and laptops, using cloud infrastructure, buying software and investment in building, infrastructure, workstation, interiors, furniture related cost.

“Expanding the scope for utilization of SEZ Reserve for these purposes shall improve the cost competitiveness of the industry. This shall also incentivize IT companies to make additional investments in SEZs, thereby contributing to exports and creating additional employment opportunities," Nasscom said in the pre-budget memorandum to the government.

The industry expects long-term exemptions for SEZ units. “To boost confidence among investors and corporates, another significant demand is to extend long-term tax relaxations for SEZs, instead of extending quarter to quarter exemptions. This will attract greater interest in the government’s long-term vision of promoting sustained growth for the sector," said Keshav R. Murugesh, group chief executive officer (CEO), WNS, a Mumbai-based BPM company.

Overall, the sector is looking forward to a budget that would give further impetus to the digital economy.

“The Indian IT sector has incorporated a change towards a digital-first mindset. The upcoming budget 2022 must propel India’s ambition to become a $5-trillion economy and $1-trillion digital economy. We need focused investments and reforms through government schemes and spending to bolster the infrastructure development pipeline, address health sector concerns, enrich the education and startup ecosystem, and boost competitiveness in the manufacturing sector," said C.P. Gurnani, managing director and CEO, Tech Mahindra.

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