How WFH could impact SEZ income deductions for IT firms

With work-from-home (WFH) becoming the new normal due to the pandemic, the information technology sector has requested the Centre to amend many of the existing laws and regulations such as those covering labour and social security.

But another issue that could impact them is uncertainty on income deductions from Special Economic Zone (SEZ) units on export of services, with the majority of the employees working from home.

The existing rules do allow companies to let their employees work from home, but with caveats. “From March 2019 onwards, SEZ rules specifically contemplate work from home for IT and ITeS companies and there are rules specifically prescribing conditions for the same,” says Gouri Puri, Partner at Shardul Amarchand Mangaldas & Co.

Before and after Covid

“There are two parts to this. First, under the Covid-19 pandemic situation, the regulator, in any case, would not have denied income tax deductions to SEZ units because of work from home. The second is a post Covid-19 scenario where companies are planning to switch to the work from home model to build cost efficiencies.”

Many IT services companies have announced that they will permanently move to an WFH model. TCS even announced that it will move nearly 75 per cent of its staff to WFH in the near future.

“IT companies could either be in the last few years of an SEZ tax holiday period or could already be out of that period,” says Sandeep Jhunjhunwala, Director at Nangia Andersen LLP. “For companies which continue to have a substantial period of tax holiday remaining towards existing operations in SEZs, implementing a work from home model for employees, on a perpetual basis post the lockdown period, can endanger retaining Section 10AA income tax deduction.”

This is because one of the principal criteria for claiming I-T deduction under Section 10AA is export of services through the physically demarcated area of an SEZ. This means the income deduction is connected to companies operating from inside an SEZ unit.

Experts say tax officials can raise questions on allowing income deduction for IT services companies after the lockdown is over if they continue to have a large chunk of their employees working from home.

Secured connectivity

Another issue that can cause concern for IT services companies operating out of an SEZ is secured connectivity. The current SEZ rules allow employees operating out of an SEZ unit to work from home. But this is for specific purposes and reasons, with attached conditions. Some of these conditions have been eased for the lockdown.

One such condition is that the laptop computer of employees working from home should be connected to the SEZ unit through a secure network. This is done through a virtual private network.

“The Department of Telecom's (DoT) work from home guidelines make it mandatory that a service provider-provided virtual private network, or PPVPN, is used by employees for working from home,” says Rajiv Chugh, Partner - Tax and Regulatory Services at EY. “On account of Covid, DoT has relaxed the guidelines and allowed companies to use a general VPN till May 31 (now extended to July 31, 2020, based on a press release).”

The industry is now asking that this VPN relaxation be made permanent. There was already a TRAI proposal to DoT — pending for nearly a year now — on allowing IT services companies to move to a general VPN.

Companies might fall foul of DoT’s WFH guidelines if they continue to use a general VPN instead of a PPVPN.

“This may have a cascading impact on their Section 10AA deductions as well, as it could be construed as violation of law. This is a grey area that has opened up, ” adds Chugh.

COMMENT NOW