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D. Murali

A look at what the tech industry is looking for in the Budget.

Bharat Varadachari

In the run-up to Budget 2007, the most prominent demand of the IT (information technology) industry appears to be the one about STP. "Dwarfing all items represented on the IT industry's list of Budget expectations this year, is the extension of tax holidays available to software and ITES (IT enabled services) exporters registered under the STP (software technology park) scheme beyond the year 2009, to bring the tax benefits on a par with those available to SEZ (special economic zone) units," says Bharat Varadachari, Partner, Global Tax Advisory Services, E&Y, in an interaction with eWorld.

"With migration of existing units to SEZs ruled out under policy, and ready access to new IT SEZs likely to pose a challenge, SMEs (small and medium enterprises) are understandably a worried lot," he explains. "Besides, for most SMEs, the levels of future business expansion envisaged may not justify incremental investments in new SEZ units."

Here are Varadachari's views on different other Budget concerns of the IT industry.

On anomalies

The IT industry needs a `permanent holiday' from the plethora of anomalous, inconsistent and incomplete provisions of Sections 10A/10B (of the Income Tax Act), which have required corporate finance functions to focus their attentions more on litigating the tax holiday claims than managing their businesses, in recent times.

Fundamental issues such as eligibility for tax holidays where STP units have been registered post commencement of operations, nature of income eligible for the holiday, definitions of the various notified ITES, export turnover and total turnover, situations involving mergers/de-mergers, subcontracting, benefits to supporting service providers, branch offices outside India, etc, merit clarity.

Other key changes demanded include exemptions to payments for software licences (which do not involve rights of commercial exploitation), extension of tax holiday benefits to SEZ units engaged in `deemed exports' and a comprehensive tax policy supporting the fledgling semi-conductor industry.

On service tax

The IT industry has received more than its share of grief on service tax, thanks to the vacillations of the country's law makers; several key issues remain unresolved. Today, service tax on input services availed by companies that provide `non-taxable' output services (e.g. software development) is not refundable.

To facilitate claim of credit/refund of the input service tax, such services should be brought on a par with `taxable services'. For maintenance or testing of software located outside India to qualify as exports, at least part performance of the service needs to be rendered outside India. A clarification would be welcome as this condition is put to test, where services are rendered remotely from India, although the work may be performed on and uploaded on to servers located outside India.

Separately, the requirement for services to have been `delivered and used' outside India in all cases involving a service recipient outside India as a pre-condition for an export exemption is too restrictive, triggers practical challenges and warrants amendment.

In sum, therefore...

From an IT industry perspective, there is hope that liberal purse strings (in the form of continuing and new tax incentives for the software/ITES and semi-conductor segments) and much needed clarity on uncertain and litigious income tax and indirect tax issues will define the Finance Minister's Budget proposals for the coming year.

In these circumstances, while the STP tax holidays deserve resurrection to help alleviate tax burdens post 2009, it is evident that the victor in the ongoing tug of war between the MoF (Ministry of Finance) and the MoC (Ministry of Commerce) will likely decide this issue rather than industry.

MuraliDe@gmail.com

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