Indian IT and BPO firms expect announcement of Advance Pricing Agreement in the 2012 Union Budget

March 3, 2012: The global spending on information technology is expected to grow at a slower rate i.e. at 3.7 per cent. This is the slowest growth rate predicted over the past three years. In such a situation the IT industry in India which depends on outsourced works from the US and Europe will find it difficult to grow and will be at considerable risk.

The Information Technology and Business Process Outsourcing sector in the country expects some kind of moves from the government in the forthcoming budget. They believe that the budget will drive their growth during the present uncertain times.

One of the major expectations in the industry is that the Advance Pricing Agreement (APA) will be announced in the 2012 budget. The Advance Pricing Agreement is a provision available in the Direct Tax Code that will take into account transfer pricing matters.

According to Som Mittal, President NASSCOM, the transfer pricing rules are irregularly applied across India and there is lack of clarity on the same. Many of the foreign companies have set up captive units in India and about 35% of the revenue in the outsourcing industry comes from such units.

The cost advantage makes India a favorable destination for the global companies. The Tax department in the country believes that transfer pricing is a means to transfer profits to safe markets and that the captive units in the country are creating more value than what they disclose so that their tax is reduced. The tax department says that the price of the service offered to the parent company should be same as that of the service given by third party service providers to any clients. The industry sources say that it is unrealistic and unjust.

In the Advanced Pricing Agreement, the service provider and the tax department will arrive at an agreement which will be based on the calculations made on the arms length price for global transactions.

The industry also expects that the government will revive the tax benefits that were provided under the Software Technology Park of India scheme. The scheme which came to an end in April 2011 has affected many of the small and medium service providers in the industry. They also expect that the Minimum Alternate Tax (MAT) which was increased in 2011 will be withdrawn in the 2012 budget.

The industry had also made a request to reduce the corporate tax from current 30 per cent to 25 per cent before the 2011 budget. But no move was made by the government in that direction. The industry expects some kind of relief in the corporate tax in the forthcoming budget.

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