Budget 2012: IT sector expects tax measures

March 12, 2012

(The views expressed in this column are the authors’ own and do not represent those of Reuters)

The technology sector is set to cross the $100 billion mark this year with $69 billion from exports and $32 billion from the domestic market. This is a healthy increase of around 16 pct over last year’s growth despite global economic events such as the anti-outsourcing bill in the U.S. and the euro zone crisis which had an impact on the sector.

It is anticipated that going forward, these global events will have a significant adverse impact on the Indian technology sector coupled with a number of measures taken by other developing countries to get more of outsourcing business.

Additionally, the Indian technology sector is reeling under the pressure of higher wage bills, high attrition, linear growth (direct link between sales growth and headcount addition), skyrocketing real estate prices, uncertainties surrounding SEZs, the write-off of large technology contracts due to cancellation of 2G licences by the Supreme Court.

As if all this was not enough, the huge transfer pricing adjustments made by transfer pricing officers leading to potential high tax outflows and routine rejection of service tax refund claims are adding fuel to the fire.

The finance minister presents the budget later this week. As witnessed over a number of years, the industry has a lot of expectations but gets disappointed. So expectations from Budget 2012 are not very high even though the finance minister, during the current five-year tenure, may not have more than one opportunity after this.

Given the background, what would this sector look from the budget document? A slew of tax measures such as:

Extension of tax holiday: To make the Indian technology sector competitive in the international market and to boost exports, a lot of stimulating incentives have been provided to the technology sector. One of them has been an income-tax holiday for a period of ten years which expired on March 31 last year. To continue boosting the cost competitiveness of the technology sector, an extension of the income-tax holiday for a further period of five to ten years would be a welcome step.

MAT on SEZ income: There were a lot of advantages provided at the time of introducing the SEZ regime in India, so as to attract both domestic as well as foreign players. Among them were tax holiday benefits. However, in last year’s budget, Minimum Alternative Tax (‘MAT’) at 20 pct was levied on SEZ profits. It would appear that the Indian government has not kept its tax holiday promise for SEZs thus affecting the confidence of investors. These investors are already faced with low interest in SEZs on account of reasons such as economic slowdown, land acquisition issues, etc. Hence, a MAT of 20 pct levied on SEZ profits should be deleted so as to provide some fillip. Alternatively, MAT should be withdrawn at least in respect of SEZs already notified, so that economic viability of such SEZs is safeguarded.

Introduction of Advance Pricing Agreements (‘APA’) provisions: Within the technology sector, a lot of transfer pricing audits and litigation is currently going on in India. The arm’s length price determined by income tax authorities in some cases has been exceptionally high. To help set fair and transparent pricing of transactions and provide income-tax certainty to companies, there is a need to introduce APA provisions. In APA, the taxpayer and tax authorities enter into an agreement, valid for five years, on the calculation method for arm’s length price for international transactions. This move could also ensure smooth transition to Direct Taxes Code (‘DTC’) which contains APA provisions.

Service tax refund: Service tax paid on input services which are utilised for export of services outside India is available for refund. It has been widely experienced that such service tax refund claims get routinely rejected based on frivolous reasons which not only prolongs the refund process thus impacting the cash flow but also add to avoidable litigation cost and creates lot of uncertainties in the minds of taxpayers. It is expected that the export-oriented units should be exempt from paying service tax on the input services, thus helping the industry to maintain its cash flows in the planned manner which will also reduce the administrative burden and costs of the taxpayer and the government.

Other policy measures, such as clarification on the timelines by which Goods and Services Tax as well as DTC will become reality will also be helpful for long-term planning.

The countdown has already begun. Let’s wait and watch what’s in store for the technology sector.

Full coverage of Budget 2012

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