India’s software services and business process outsourcing (BPO) industry took some cheer from the finance minister’s budget speech, which said rules on safe harbour will be issued after examining recommendations of the Rangachary Committee, the last of which is expected by the end of next month. Safe harbour was announced in the budget in 2009 but the rules are yet to be finalised and become effective.
“”The proposed safe harbour for the IT sector is not really new. What is important is when it’s going to be implemented,”" said Ganesh Natarajan, former Nasscom chairman and CEO of Zensar Technologies BSE -1.08 %. Some of the transfer pricing issues relate to loans given to foreign subsidiaries and to whether companies are keeping more profits in their overseas subsidiaries to avoid paying tax here.
Software companies have been complaining about harassment and arbitrary demands being made by tax authorities on transfer pricing. Till a few years back, most transfer pricing demands were made on captives and foreign IT firms but now several India headquartered firms are also facing issues. “”Some of the demands are totally absurd and arbitrary,”" said the CEO of a Pune-based software firm, who requested anonymity. “”Anyone who has a foreign subsidiary is facing trouble,”" he said.
Most of the other issues facing software industry have also not received much attention in the budget.
“”Budget 2013 has been disappointing for the IT-BPO sector,”" said Pradeep Udhas, partner, IT & ITES, KPMG India. “”The main issues raised by the industry like rollback of taxation on software treated as royalty, removal of the minimal contiguous land requirement for SEZs, dual levy of VAT and service tax on domestic software sales and more clarity on transfer pricing norms for the sector have been left unaddressed. One hopes that the finance minister will keep his promise of releasing the findings of the Rangachary committee by end of March 2013,”" he said.
One of the recommendations of industry body Nasscom was that dual taxation — service tax and VAT — on software products be resolved. Additionally, companies said revenues from software licensing transactions should not be viewed as royalty payments. “”These revenues should be viewed as payments for ‘use of a copyrighted article’ rather than as royalty,”" said Hanuman Tripathi, group managing director, Infrasoft Technologies.
“”Retroactive amendments coupled with conflicting jurisprudence on the subject mandates a need for rationalisation of treatment of software as “Royalty” which is subject to tax in India. Roll back of taxation of the same is clearly the ask of the industry as the non-compliance implications are dual – one in the form of interest levy and penal consequences and the other in the form of disallowance of the same as expenditure whilst computing the taxable income of the payer,”" said Pallavi Singhal, associate director – tax and regulatory services, PricewaterhouseCoopers.
Some of the other demands of the outsourcing industry were a tailored incentive model for R&D, extending it to products and services and that R&D services should be made eligible for SEZ benefits. Some companies were also hoping for a reduction in Minimum Alternate Tax (MAT) on SEZs to 10%.