Hard Expectations The industry is hoping for the government’s support through a budget focused on a growth-oriented tax policy framework
T The sectors expectation will be to have clarity and rationalization of the tax regime, which will go a long way in promoting the much needed boost for investments 36 | February 15, 2012
he Indian technology sector has shown remarkable resilience during the downturn and has played an important role in placing India on the worldmap as a major knowledge based economy and outsourcing hub. In addition to fuelling India’s economy, this sector is also positively influencing the lives of its people through an active, direct, and indirect contribution to various socio-economic parameters such as employment, standard of living, and diversity. However the technology and telecom sectors are not without their share of concerns; as regards the sustainability of this growth’s signs of downturn in the US, instability, pricing pressures in the domestic market, inflationary pressures and protectionist policies in the US, and stiff competition from the low-cost South East Asian jurisdictions have all forced the sector to present a conservative outlook. While the concerns on the direct and indirect tax front have not been significantly addressed over the last couple of years, the long-term clarity and stability on the policies intended by the government for these sectors would certainly be welcomed by the players in these sectors. In the backdrop of the challenging economic scenario, the government’s proposals in Budget 2012 are keenly awaited.
The levy of Minimum Alternate Tax (MAT) on the Special Economic Zone (SEZ) developers and units as high as 18.5% on the book profits, has significantly diluted the benefits offered under the popular SEZ regime. The industry players are in a dilemma as regards to their future expansion plans. Another point of concern is the carry forward and set off of MAT credit entitlement, which is presently only allowed for a period of 10 years. This is generally not always sufficient and most companies availing the benefits of the SEZ scheme may not be able to utilize MAT credit efficiently and within the prescribed time limits. visit www.dqindia.com
DATAQUEST | A CyberMedia Publication
Abolishing MAT levy on the SEZ developers or units would certainly be a positive measure, which should bring some relief to the sector. Further, the carry forward of MAT credit entitlement for an indefinite period would certainly be a welcome step. The taxability of purchase and licensing of software continue to be another issue plaguing the industry players. Characterization of payments received for use or right to use software products has been a contentious issue in the recent times. While there have been several rulings which have appreciated the distinction between use of a copyright and a copyrighted article in the case of shrink-wrapped software, the present rulings do not seem to accept this distinction. As the stakes are high, the sector would like to get clarification on whether payments made for the use of shrink-wrapped software would be taxable as royalty or not to avoid uncertainty among taxpayers. On the indirect tax front, the issues surrounding the dual levy of VAT and service tax on licensing of software are likely to manifold with the FM’s proposal to shift to a ‘negative list of services’ basis of taxing services possibly this budget. It appears that the software industry is not likely to see respite on this issue until the implementation of GST, which may be a few years away. The pullback of the input tax credits on several key input services made in the last budget has added to the worries of the technology and IT sectors, dealing with the slowdown in the US and European markets. With the negative list the industry is only hoping that credit of taxes paid on all its services used for business operations will be reinstated.
The sector players lack clarity on the treatment to be adopted for corporate tax purposes in respect of massive upfront spectrum fee payment. The DATAQUEST | A CyberMedia Publication
government should therefore, bring out specific amendments in the income tax law, so as to provide for depreciation claim on the upfront spectrum fee payment (as being in the nature of ‘intangibles’). Considering that telecom is a capital-intensive sector, the exemption of interest on long-term finance and long-term capital gains arising to the investing companies or infrastructure capital funds for investments in the telecom service companies under section 10(23G) of the IT Act should also be restored, so as to provide an impetus to the sector. This sector is also looking forward to the extension of the tax holiday benefits under section 80-IA of the IT Act to operators who have started providing telecom services after March 31, 2005. Such extension would not only provide a level playing field for the new entrants, but would also provide an impetus to the telecom sector, given the long gestation period. On the indirect tax front, as the telecom sector moves into a phase of making significant investments in the infrastructure, both for expanding the reach as also newer technologies such as 3G, today, the sector is facing ambiguities resulting in an adverse impact on investment and operations. One of the areas requiring urgent rationalization is on the availability of input tax credit of duties paid on telecom infrastructure (which is the backbone of the entire network), explicit confirmation that telecom service provided to the foreign telecom operators should qualify as export of service, as well as the restoration of some of the export incentives that are available to other service sectors. The sector continues to grapple with building systems that conform with guidelines set out in the recent point of taxation rules. The sectors expectation will be to have clarity and rationalization of the tax regime, visit www.dqindia.com
which will go a long way in promoting the much needed boost for investments in this sector. Another important expectation of the sectors would be the extension of additional depreciation to service industries as well, which is currently available only to the manufacturing sector. The steady growth in the contribution by various service industries to the country’s GDP should be augmented, by incentivizing the service industry by extending the initial depreciation benefit to them. On the transfer pricing front, the industry is still awaiting the detailed rules to operationalize the safe harbor provisions, which was first announced in Budget 2009. It is expected that taxpayers meeting the safe harbor thresholds laid down in these provisions would not be subject to transfer pricing scrutiny. The industry is hopeful that safe harbor rules are issued in Budget 2012, so as to ensure its expeditious implementation. The government should also consider the implementation of an Advance Pricing Arrangement (APA) framework in this year’s budget. The proposed draft of the direct tax code in any case contains provisions for an APA framework, wherein a taxpayer could enter into an APA with the revenue authorities, as regards his transfer pricing arrangement with group companies. The industry is hoping for the government’s continuing support through a budget focused on a growth-oriented tax policy framework, which in turn would help it emerge unscathed from this challenging economic scenario. (The opinions expressed are those of the author). n
RAVI MAHAJAN The author is tax partner, Ernst and Young firstname.lastname@example.org (With inputs from Giselle Barboza, senior tax professional, Ernst & Young) February 15, 2012 | 37