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Budger 2014: The IT-BPO Industry Wishlist

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India's new government has generated a lot of positivity with its promising election campaigning. As a result, the new government's maiden and much awaited Budget carries a baggage of expectations from different stakeholders. While the mounting fiscal deficit is conundrum, there is an equal need to incentivise the stagnant indigenous industry. It would be exciting to see how the new government strikes balance between the expectations and practical challenges.

At an estimated $118 billion the Indian IT-BPO industry is a critical constituent of India's economy, which provides direct employment to 3 million professionals, contributes to about 8 per cent of India's GDP and a quarter of India's total export. The boom of this sector has lead to the rise of modern urban population and the government is expected to boost it's sentiments for achieving the next stage of growth.

The IT-BPO industry's key expectations in the form of direct tax proposals are briefly captured below:

MAT on Special Economic Zones ('SEZs'): While the commerce ministry promised granting complete tax holiday to SEZ units, it was later subjected to levy of Minimum Alternate Taxes ('MAT') from year 2011-12 by the Finance ministry. The prevalent MAT rate is as high as 18.5%. As a result, though they are eligible for tax holiday the SEZ units  ultimately end up paying 18.5% tax on their book profits.

Withdrawal of MAT on SEZ units is the need of the hour to provide a necessary fillip to the SEZ initiative as was originally intended.

Promotion of Electronics/Semi-Conductor Manufacturing: In order to boost the Indian electronics manufacturing industry, the government had floated the National Policy on Electronics in 2012. The Policy was intended at promoting India as a manufacturing hub for the electronics segment. So, with a view to capitalise on the bulgeoning demand of technological products the new government should consider providing an 'effective' single window clearance mechanism to the Electronics/Semi-Conductor Manufacturing industry.

Promotion of Exports: India has emerged as the key destination for global sourcing of IT and ITeS with a share of more than 50% of the global market. However, India is now facing stiff competition from other countries such as Philippines, Brazil, etc on the cost competitiveness front.

In order to promote growth, we need to generate employment in tier II and III cities allowing the domestic IT companies to compete on a global platform. Tax sops can be provided to new units in identified non-SEZ locations.

Software Taxation: Retroactive amendments coupled with conflicting jurisprudence on software taxation have made it necessary to rationalise the treatment of payment for software from withholding tax and service tax perspective. The new government has also hinted at doing away with ambivalent tax policies. Further, it is imperative to clarify that the retroactive amendments, which have an impact on taxation of software and services, will not have an overriding impact on the DTAA (tax treaties) India has entered into with various countries.

In particular, the rollback of retroactive amendments is clearly the need of the hour to demonstrate the environment of stability and certainty within the industry.

Rationalisation of dispute resolution mechanism: IT-BPO industry has been a victim of high pitched transfer pricing adjustments and rejection of tax holiday claims. While the government has come up with provisions for Advance Pricing Agreements and safe harbour regulations, the overall dispute resolution mechanism requires overhauling and speeding up of the disposals with greater accountability. One of the steps towards this objective could be reduction in the safe harbour margins to acceptable levels. This will encourage tax payers to avail the benefit of safe harbour regulations and reduce the ever increasing transfer pricing disputes. This could prove to be win-win situation for both revenue authorities as well as tax payers.

Overall, the Budget 2014 needs to create a positive environment which is not ephemeral but, to the contrary should boost economy by laying strong foundation for accelerated growth.

Inputs by Nirav Shah, Senior Manager & Anand Patel, Assistant Manager, Tax and Regulatory Services, PwC India