August 11, 2011: If it was economic downgrading of US last week, then this week it is the decision on imposing tax on Service providers in the telecom industries making buzz in the IT and ITES companies. The decision is definitely going to have a bad impact on the cash flow of Information Technology (IT) companies.
The finance minister of India, Mr. Pranab Mukharjee said earlier this week that the companies in the IT and ITES sector has to pay service taxes in India for availing the service of Foreign Service networks providers. Making the decision more clear the central Board of Excise and Custom authorities said that the companies which receives service from foreign countries in the telecom sector has to pay service tax under business support service to the Government of India.
Now, it is for sure that the step taken by the Indian government will have a negative impact on the IT and ITES companies in India. Majority of the Business Process Outsourcing (BPO), Information Technology (IT) and Information Technology Enabled Services (ITES) companies seek the service of network providers abroad. Since the companies avail the service of Foreign Service providers, they are liable to pay the tax and as a result it will increase their outflow. There are also speculations on a rise in the international telephone charges. This could make operating cost much higher too.
It is noticeable that the service providers outside India cannot be taxed under the financial act of India. Thus it makes no sense in imposing service tax on the payment made to such service providers. But according to Central Board of Excise and Custom the companies have to pay tax under Business Support Service. Experts however have raised their opinion that service provides abroad cannot be classified in business support services category for tax collection.
The imposing of tax on Foreign Service providers will disturb the companies which seeks service abroad. Increase in cash out flow will also disturb the smooth functioning of the company and the financial stability all of a sudden. However the companies which rely on own facilities and infrastructure will have a minimal impact.
The companies in the sector will have to take necessary strategies to minimize the impact of the decision on cash flow.