India Budget 2013 disappoints IT-BPO industry, raises hopes on tax clarity

In an otherwise disappointing India Budget 2013 for the IT-BPO industry, there was something to cheer regarding tax clarity. Indian IT-BPO industry’s hopes were raised when finance minister, P. Chidambaram said in his budget speech that the rules regarding safe harbor will soon be issued. This will be after careful examination of recommendations put forward by Rangachary Committee.
India Budget 2013
The last recommendation from the committee is expected to be put forward by the end of the next month. Safe harbor was part of Budget 2009 but has not yet been implemented since the rules for the same have not been finalized yet.

Tax pricing issues

According to Ganesh Natarajan, CEO, Zensar Technologies and former chairman, Nasscom, the safe harbor for IT industry is not a new concept but the crucial question is when it will be implemented. This is extremely important in the light of tax pricing issues. These issues surround the loans issued to foreign subsidiaries. Companies are also blamed that they keep more profits in their subsidiaries abroad in order to pay less tax here.

Software companies have been increasingly complaining as well, about the harassment they face from tax authorities through arbitrary demands on transfer pricing. Most of the transfer pricing demands until a few years ago were on foreign IT firms and captives, but now firms headquartered in India are also being targeted.

Apart from the promise of implementation of rules of safe harbor, the other issues plaguing the industry have not even been given much attention making Budget 2013 an otherwise disappointing affair for IT-BPO industry.

Other issues unaddressed

There have been several issues that the industry hoped would be addressed in Budget 2013 but remained largely neglected. Rollback on taxation levied on software which is treated as royalty, dual levy of service tax and VAT on domestic sales of software,  removal of minimum amount of contiguous land required for SEZs, clarity on norms of transfer pricing etc. were the concerns of the industry.

Pradeep Udhas who is partner, IT and ITES at KPMG India hopes that the finance minister will be able to stick to his promise when he said that the Rangachary committee recommendations will be released by March end.

Companies had wanted revenue from transactions of software licensing not to be seen as royalty payments. Pallavi Singhal who is associate director of tax and regulatory services at PricewaterhouseCoopers said that the non-compliance implications in this matter are dual.

One comes in the form of penal consequences and interest levy while the other is its disallowance as expenditure during the computation of taxable income of the tax payer.

Budget 2013 failed to address several other demands of the industry including tailored incentive model meant for R&D, extension of this model to services and products and making the R&D services eligible for benefits of SEZ. A reduction of 10% in MAT (Minimum Alternate Tax) levied on SEZs was also expected by some companies.

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