The author Austin O’Malley said, “In levying taxes and in shearing sheep, it is well to stop when you get down to the skin”.
The Information Technology (IT) sector in India has seen a reduction in tax benefits over the years. Removal of the marquee Section 80HHC commenced the trend which the Minimum Alternate Tax (MAT) completed.
Unwilling to tax the sector completely, one of the deductions that the revenue retained were the ones under Section 10A and 10B of the Income-Tax Act that provided a tax holiday to units set up in tax-free zones. A hazy wording of the Section and a set of confusing notifications led to disputes and demands between the department and the tax-payer.
A new Circular in 2013 attempts to set this right. The Circular appears to be the first in a series that will implement the recommendations of the N. Rangachary Committee. The Committee’s report on other issues pertaining to development centres, safe harbour provisions for the IT/ITES sector and for outbound loans and corporate guarantees are to follow.
Core areas of dispute
Circular 1/2013 answers seven questions that have been the core areas of dispute. The Circular clarifies that on-site development of software is eligible for the benefits under Section 10A and 10B as they would be considered to be deemed exports.
However, since the benefits under these provisions can be availed of only by units or undertakings set up under specified schemes, it is necessary that there must exist a direct and intimate nexus or connection of development of software done abroad with the eligible units set up in India and such development of software should be pursuant to a contract between a client and an eligible unit.
Establishment of the nexus or connection has perennially troubled both the makers and abiders of the law and hence more light needs to be shed on this by way of illustrative examples wherein nexus can be said to have been established.
The Circular answers a long-pending issue — whether receipts from deputation of technical manpower for on-site software development amounts to export of software --- positively. The Circular goes on to clarify that a Statement of Work (SOW) would prevail over a Master Service Agreement (MSA) in the eyes of the taxman. Any Research and Development embedded in the engineering and design portion would also be covered.
Whether a slump-sale of an undertaking would take away the tax benefits under Section 10A,10AA or 10B is tackled next. Before clarifying that the deductions would not go away just because there has been a slump-sale, the Circular states that it depends on how the slump-sale is made and what is its nature. The intent behind this wording can only be left to imagination.
It is stated that there is no requirement to maintain separate books of account to avail these tax breaks though the books of account should be able to provide on tap whatever information is needed. Inter-SEZ transfers would not take away the deduction.
Finally, the Circular states that setting up a new unit where there is already an existing one cannot be a reason to deny the deductions — both units should be eligible provided they are not set up by splitting or reconstruction of businesses.
Though welcome, the Circular seems to be very guarded and inelegant in clarifying matters and could lead to further disputes between trigger-happy officers and impatient tax-payers, which needs to be minimised.
The IT industry is still the bellwether when it comes to getting foreign exchange and generating employment for the country. There is a touch of concern that the consistent rise in employee wage, general inflation and emergence of lower-than-India cost countries is reducing the attractiveness of India as an IT destination. The Income-Tax Act should not add to this.
(The author is Director, Finance, Ellucian.)