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Indian IT companies will continue to get tax benefits: Finance Ministry
January, 18th 2013

The finance ministry has said software development at client locations and deployment of personnel abroad by India's IT firms such as InfosysBSE -0.18 %, WiproBSE -5.06 %, and TCSBSE -0.37 % will continue to get tax exemptions, drawing cheer from the $100 billion sector.

The Central Board of Direct Taxes on Thursday said 'onsite' work at client locations by software firms would be treated as deemed exports, making them eligible for tax benefits. It also said deployment of manpower abroad and transfer of a software unit from one special economic zone to another would not impact these concessions.

"We hope that these clarifications will set the disputes to rest," CBDT chairperson Poonam Kishore Saxena told reporters.

The clarifications are based on the recommendations of a panel headed by former CBDT Chairman N Rangachary, set up by Prime Minister Manmohan Singh following representations from industry.

The clarifications address key concerns of the software sector over the stability of tax exemptions enjoyed by them under various schemes, after tax authorities started issuing notices and raising tax demands.

The industry was quick to cheer the announcement, but said past assessments and denials of benefits should be resolved in line with the latest clarifications.

"While this is a positive step, it is important that the implementation is carried on efficiently. We urge that benefits denied in the past be reviewed in light of this move, and there be swift closure of cases for the Industry to benefit from this," Nasscom President Som Mittal said in a statement.

Nasscom represents the $100 billion Indian IT-ITeS industry, which earns almost $79 billion from exports. India accounts for less than 5% of global technology spending.

"These clarifications largely address most of industry's concerns," said Pranav Satya, partner, Ernst & Young.

The clarifications issued by the Central Board of Direct Taxes come days before Finance Minister P Chidambaram embarks on a visit to Hong Kong and Singapore to woo investors.

Software companies enjoy tax exemptions under special economic zone scheme and software technology park scheme, but disputes arose between the industry and the tax department after exemptions available on export of software services were denied on various grounds.

Different interpretations of existing laws gave rise to disputes and litigation.

"It is clarified that the software developed abroad at a client's place would be eligible for benefits under the respective provisions, because these would amount to 'deemed export' and tax benefits would not be denied merely on this ground," the Central Board of Direct Taxes said in a statement.

But the CBDT said a "direct and intimate" connection would be necessary between development of software abroad and the units to be eligible for tax benefit. Also, the development of software would have to follow a contract between clients and the eligible unit.

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