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Non-refund of service tax a major issue
February, 14th 2013

The $100 billion Indian IT/ITeS industry has been growing at a compounded annual growth rate of over 22% for the last one decade.

However, in the current fiscal, the sector is going through a challenging phase due to grim macroeconomic scenario, turmoil in key markets (the US and the UK), currency volatility, domestic “policy paralysis”, lower spend on IT and long sales cycle impacted by slow decision-making at the customer end.

Transfer pricing
Although one applauds the advent of advance pricing mechanisms in India, it would be helpful if there is some certainty around the mark-ups being proposed for IT-ITeS companies. In lieu of the sector enlarging in emerging areas such as KPO, R&D and cloud, certainty through safe-harbour formulation will aid the sector in creating a stable environment in adherence to the arm’s length criterion.

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Also, Domestic Transfer Pricing provisions should not be applied to tax neutral transactions, which merely add to the administrative compliance.

Non-issuance of service tax refunds continues to pose the biggest challenge for the sector. Additionally, the issuance of the recent notification mandating collection of demands despite pendency of appeals and stay petitions adds to the blockage of funds and unwarranted court action. It would also help if final clarity on treatment of domestic delivery of software, which is considered as goods and is subject to VAT as well as service tax, is made.

Special economic zones
The demand of removal of the minimal contiguous land requirement of 25 acre for SEZ eligibility continues to persist. Also, the withdrawal of MAT, which casts a huge burden on SEZ units that have otherwise been promised tax holiday, is needed.

Software taxation
Retroactive amendments coupled with conflicting jurisprudence on the subject mandates a need for rationalisation of treatment of software as ‘royalty’, which is subject to tax in India. Rollback of taxation is needed as the non-compliance implications are dual – one in the form of interest levy and penal consequences, and the other in the form of disallowance of the same as expenditure, while computing the taxable income of the payer.

The retrospective amendment exposes companies to punitive action for non-deduction of withholding taxes for the past period, which should be condoned.

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