‘Negative' woes for IT sector

The introduction of negative list of services, a precursor to GST, was widely expected to address the double taxation conundrum for the IT sector. Activities like licensing and maintenance of software suffer dual taxation of service tax and VAT, impacting the trade negatively.

In the negative-list regime, trading of goods falls within the negative list while a transaction of right to use intellectual property is declared as service. Therefore, the issue of whether sale of packaged software on a CD will constitute trading of goods or right to use of intellectual property still remains unresolved.

Also, while the export rules are yet to be introduced, it appears that export benefit to certain transactions such as development and customisation of software will need to be re-evaluated as the fine print suggests the benefit may not be available in certain situations.

The saga of double taxation may continue for the IT sector. Certain aspects of the negative list of services may also impact in a negative way, perhaps unintentionally.

FDI policy 5.0

The fifth edition of the FDI policy applicable from April 10 has been issued by the Department of Industrial Policy and Promotion, with a sunset clause of one year.

The current issue incorporates the provisions notified earlier, from October 1, 2011, to April 9, through press notes and Reserve Bank of India circulars, namely regulations governing investment by foreign venture capital investors/ qualified foreign investors, FDI in pharmaceutical sector/ single brand retailing, and transfer of shares/ convertible debentures of companies engaged in the financial services sector.

The foreign institutional investors (FII) limit of 23 per cent in commodity exchanges has been brought under the automatic route and import of second-hand machinery from conversion into equity has been excluded. The circular clarified that FII investment beyond 24 per cent and up to sectoral cap would require prior intimation to RBI; ‘leasing and finance business' would not cover operating lease; and 50 per cent development in the case of construction development projects would be applicable to each project.

Double taxation for movable property

By design or default, the definition of work contract under the proposed negative list regime recognises only those in relation to immovable property. Thus, works contract in relation to movable property will be considered as ‘Repairs and Maintenance, Erection Commissioning' services and so on.

The value of goods used in the works contracts (that is, repairs contract, AMC and so on ) is subject to VAT. As the negative list-based taxation considers only service provided under a contract pertaining to land and buildings as works contract, the exemption on account of value of goods is not extended to the works contract for moveable goods. Furthermorenotification No. 12/ 2003 providing exemption on account of value of sale of goods would be discontinued. This may lead to levy of service tax on total contract value of works contract for moveable goods, as there would not be any specific exclusion of the value of goods used in such contracts.

The impact of double taxation will be borne by the trade, industry and consumer in terms of additional outflow from their pockets.

Widening transfer pricing ambit

The Finance Bill 2012 has expanded the scope of transfer pricing provisions to include ‘specified domestic transactions', to cover the following transactions, provided their aggregate value during the financial year exceeds Rs 5 crore:

Payments (that is, only expenditure) to specific related parties (as referred to in Section 40A(2)(b) of the Indian Income-Tax Act, 1961);

Transactions between tax-holiday eligible units and other business of the same taxpayer;

Computation of ordinary profits of tax holiday unit of the taxpayer, where there are transactions with entities with close connection;

Such other transactions, as may be prescribed.

Accordingly, taxpayers entering into such SDTs have to file an accountant's report and maintain prescribed TP documentation.

Non-maintenance of mandatory documentation can result in a penalty of 2 per cent of the value of the SDTs between related parties. Moreover, additional penalties of 2 per cent of the transaction value for non-reporting of transactions and for incorrect maintenance/submission of documents have been proposed.

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