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Chennai: According to Indian IT-BPO sector performance estimates FY 09-10 released by Nasscom Indian IT sector presently contributes nearly 6 per cent to the national GDP, employs approximately 2.3 million people directly and over 8 million people indirectly and has a global market share of 51 percent.
The sector is currently facing acute challenges from multiple front, namely, current global slowdown, protectionist policies of the new US administration, appreciation in rupee, increasing cost and emergences of cost-effective outsourcing destinations like Philippines, Vietnam, China and Eastern European nations.
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In the backdrop of this changing economic scenario and the run up to the Budget 2010, the IT industry is looking for support from the Government to help overcome the crisis by addressing the below mentioned in the Budget 2010.
Considering the recent economic developments and the thin margins at which the Indian IT industry operates, one of the key area where the industry is looking at the Finance Ministry is the extension of the unexpired tax holiday period of the units located in Software Technology Parks (STPs) and Export Oriented Units (EOUs), which ends in Financial Year 2010-11, by another three years to 2013-14.
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Further the STPs and EOUs do not enjoy a pure tax free status (as envisaged by the original legislative intent) as they are subject to Minimum Alternative Tax (MAT) at a rate of 16.995% on their book profits. Given the prevailing economic downturn, the levy of MAT results in immediate cash outflow causes undue financial hardship. Therefore a rollback of MAT for units operating in STPs and EOUs would bring immediate respite. Also this would create a level playing field for units located in STPs, EOUs and SEZs, which enjoy an exemption from payment of MAT.
The Finance Act 2009 had rectified the anomaly relating to computation of exempt profit under Section 10AA of I-T Act with effect from Assessment Year 2010-11. However, it does not address the anomaly for AYs prior to AY 2010-11. In this regard a clarification/ amendment is essential to provide benefit of the above to units set up before AY 2010-11.
In the last few years, captive subsidiaries of foreign companies have faced intense scrutiny in transfer pricing audits with latest number suggesting that adjustments amounting to approximately Rs 10,000 crores for AY 2006-07. In order to resolve the increasing transfer pricing controversy, FA 2009 had introduced an alternative dispute resolution panel.
However, this being the first year of implementation it remains an unexplored and untested avenue. Further as envisaged by FA 2009, detailed rules to implement the safe harbor provisions are still keenly awaited by the industry to bridge the expectations of conservative tax payers and that of greedy tax authorities.
When compared with other developed countries, there is also a need for introduction of Advanced Pricing Arrangements (APA) wherein the taxpayer can enter into an APA with the Revenue Authorities and mutually decide on arm's length price in case of international transactions with their overseas group companies.
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From Indirect Tax perspective, the most critical issue faced by the industry is double taxation of software under Valued Added Tax (VAT) and Service Tax law. There is an uncertainty on applicability of VAT and/ or Service tax on packaged software and customised software. In principal, local and union Government agree that VAT is applicable on sale or deemed sale of packaged software and Service tax on customised software.
However, the failure on the part of tax authorities to demarcate the line between package and customised software has led to incidences of double taxation and protracted litigations. Therefore, there is an imperative need to have a clear distinction between software as services and software as goods.
Further the credit mechanism needs a considerate view in inclusion of 'Information Technology Software Service' (ITSS) under Rule 6(5) of Cenvat Credit Rules, 2004 (CCR), where 100 percent Cenvat Credit on common input services is allowed for both taxable and non-taxable output services.
Lastly, the Budget 2010 proposals would be seen as a guiding path for the implementation of Direct Tax Code (DTC) and Good and Service Tax (GST).
The authors are Senior Tax Professional, Ernst & Young. The views expressed are personal
