IT sector seeks concrete tax reforms, not just govt biz

The information technology sector was severely impacted by worldwide recession during 2009, but in 2010 the sector has shown signs of recovery.

Having said this, other macroeconomic factors like liquidity crunch, higher interest rates and emergence of other low-cost destinations have played a significant impact on the growth of this sector in India.

In these times, the sector is looking for the central government towards its continued support on the policy front as well as relaxing certain procedures on direct and indirect taxes.

This is apart from government spending in this sector in various projects taken up by the Technology Advisory Group for Unique Projects headed by Nandan Nilekani.
The following are the key tax-related expectations from the Union Budget:

Direct tax
The government has proposed to end the tax holiday to Software Technology Parks (STP) units on March 31, 2011, which was earlier in line with the introduction of the Direct Tax Code (DTC) from April 1, 2011. However, as the DTC is deferred to April 1, 2012, the industry has requested for removal of the sun-set clause, so that units can get the deduction till April 1, 2012 when the DTC comes into force. 

This extension is specifically required for small and medium enterprises, which operate on lower margins and are unable to set up units in SEZs.

Presently the industry is impacted greatly on account of the ever-increasing Minimum alternate tax (MAT). In fact, the MAT rate is nearly 2/3rd of the normal tax rate, with the IT sector subjected to this as well. Though MAT credit can be set off within a period of 10 years, companies eligible for tax holidays have already accumulated substantial MAT credits, with concerns on ability to avail the credit either under the Act or under the DTC.

The issue of withholding taxes for non-resident payments has been a subject matter of legal dispute. This has extended even to the supply of software by non-residents, with respect to its characterisation and taxability as royalty or business income.  The industry looks for clarity on these payments as the cost of doing business in India becomes uncertain on account of these legal disputes.

Indirect tax
The industry has been plagued with the issue of dual taxes on software with the dispute not only on VAT and Service tax but also Excise duty and Service tax.  The Government has been flip flopping on the levy of excise and service tax on software, trying to achieve an “ideal” system to tax all possible transactions relating to software only once. 

However, every attempt to resolve this has created newer issues for the industry.  The most recent policy is to exempt service tax if excise duty or CVD is remitted based on the MRP of the software. 

This may have resolved the issue of the distributors/ retailers not having to comply with service tax law, but the uncertainty now extends to the dual levy of excise duty / CVD and service tax on other transactions like software with royalty payments or sales made to institutional/ industrial consumers (wherein affixation of MRP may not be required).

The Central government has been attempting to relax the procedures relating to refund of taxes paid by exporters, as seen in the previous Budget as well as circulars on the issue.  However, the industry is faced with procedural bottlenecks on account of lack of willingness of the Department to issue refunds.

The new procedures, though intended to expedite refund claims, have resulted in extensive requirements of documentation, a detailed process of certification by the statutory auditor and detailed submissions being required on justifying the link of input services with the export services.

All of this, not meaningfully resulting in refund claims being processed.

Goods and services tax (GST), which is by far, the most significant indirect tax reform in India, is now scheduled to be implemented w.e.f April 2012.

GST is expected to resolve never-ending issues like taxation of software and also address the replace the fragmented credit structure in B2B transactions, which significant impacts the IT industry.

In this Budget, the IT industry is eagerly awaiting for an affirmation of the centre’s commitment to introduce GST by this date and also for policy changes in service tax and excise duty, such as broad-basing of the credit scheme upfront itself, for a smooth transition into GST.  Also, the IT industry awaits the introduction of the Constitution Amendment Bill wrt GST in the Budget session of Parliament.

The writer is partner, BMR Advisors.
With inputs from Kunal Wadhwa, associate director. Views are personal