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Experts urge clarity on software payment tax
November, 02nd 2015

The justice R V Easwar committee on the Income Tax Act set up last week would do well to clarify whether payments for software should attract income tax or service tax, and make safe harbour profit margins more realistic, tax experts said. Tax demands based on ‘excessive’ advertising and promotional spending were also a cause for concern for the industry and the committee could address this issue as well, they added.

Addressing specific issues being fought in courts for decades without resolution, as well as the trust deficit between tax payers and the administration, would help in avoiding far-fetched tax claims that eventually fail the test of judicial scrutiny, tax experts who FE spoke to said.

At present, about 77,000 tax disputes are pending in various courts involving a total demand of Rs 1,87,000 crore.

Making the systemic changes would also help in improving the current situation of direct tax arrears having surpassed the annual revenue collection target for the department. Arrears have now crossed Rs 8.3 lakh crore, way above the Rs 7.9-lakh crore direct tax collection target set for this fiscal. Besides disputes in courts, the total tax arrears would also include, cases that are pending before the commissioner (appeals), dispute resolution panels and cases where demands are not recoverable or have been raised against future tax liability.

The Easwar panel, appointed by finance minister Arun Jaitley, is set to suggest changes in the Income Tax Act that would improve the quality of the assessment work by field officers, curtail litigation and help officers to focus on demands that are actually recoverable.

“Taxation of MNCs, which has a bearing on the country’s stature as an investment destination, the appeal process within the tax department, a simpler tax regime for individuals and partnerships that would reduce their compliance burden and regaining taxpayers’ trust in the large taxpayer unit scheme deserve to be addressed on priority,” said Mukesh Butani, managing partner, BMR Legal.

According to Sanjay Sanghvi, partner, Khaitan & Company, there is a need for clarity on whether conversion of preference shares to equity as part of an M&A deal would lead to capital gains. Also, the declaration on payments made to non-residents could be limited to only payments above a specified threshold so that businesses are not unnecessarily burdened with inconsequential paperwork.

“Setting up of the justice Easwar panel is a positive step towards ensuring a non-adversarial tax regime. If taken to a logical conclusion, it can make a huge positive difference to the ease of doing business,” said Sanghvi.

At present, the income tax department levies tax on payments made for the use of software treating it as royalty, while the indirect tax administration treats it as a taxable provision of service, leading to levy of both and disputes in many cases.

Industry players also want the safe harbour profit margins to be made more realistic for MNCs so that their Indian units can sign up for the scheme and avoid rigorous transfer pricing documentation. Availing of this scheme would also give certainty to the Indian and overseas units about the tax outgo in their respective countries and help them avoid possible double taxation in the normal assessment process.

Taxation of expenses incurred on marketing intangibles is also a big area of concern for foreign companies. Many tax demands made to companies for ‘excessive’ advertising and marketing promotion spending are now being heard in the Supreme Court. Companies like Canon India, Daikin India, Haier Appliances, Reebok India, Casio India and Discovery Communications have disputed tax demands on this count.

 
 
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