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IT awaits a holiday Budget
July, 03rd 2009

The US stand on tax breaks for firms outsourcing jobs to overseas destinations, and the competition to Indian IT-ITES (information technology enabled services) from emerging outsourcing destinations such as the Philippines, China, Sri Lanka and Mexico, are among the worries that Balaji N. V. , a senior tax professional with Ernst & Young, India, expresses, during a recent email interaction with Business Line.

A recent report has indicated that the Indian IT-ITES industry, in the light of the worst-ever global meltdown, is expected to grow at 10.8 per cent in 2009, the lowest in the last five years. The decline in growth rate in this sector has repercussions on other sectors too, he adds.

Excerpts from the interview.

What are the top expectations of the industry?

To ensure that India continues to be an attractive destination for outsourcing of IT-ITES and investment into this sector, the industry expects the Finance Minister to consider the following fiscal incentives, during the Budget:

Extension of the availability of benefits under Sections 10A/10B of the Income-Tax Act for Software Technology Parks of India (STPI) and Export Oriented Units (EOU) beyond the sunset date of March 31, 2010;

Abolition of Minimum Alternative Tax (MAT) for STPI and EOUs;

Amendment in Section 10AA of the I-T Act, relating to Special Economic Zone (SEZ) units to ensure that there is no dilution in the availability of tax holiday owing to an anomaly in the formula prescribed for computing the tax deduction;

Safe harbour provisions in transfer pricing regulations and also introducing advance pricing mechanisms;

Removal of the levy of Fringe Benefit Tax (FBT) on Employee Stock Option Plans (ESOPs);

Abolishing the duplication of indirect taxes for software licensing.

On tax holiday.

The benefits of Sections 10A/10B of the I-T Act for the units located in STPI and EOUs, need to be extended beyond 2010, so that these units also enjoy the benefits for fifteen years, placing them on par with the units located in SEZ. This would particularly help the smaller units, enjoying the benefits under the aforesaid sections, which could not move into SEZ. It is pertinent to note that the Commerce and IT Ministries are also keen on this amendment.

The Government has brought the units enjoying benefits under Section 10A/10B within the purview of MAT. Though, this is not the first time that tax holiday promise is withdrawn partly, it would only be fair that the Government stands by its commitment.

At present, profits of the SEZ unit, in proportion of the export turnover to the total turnover of the assessee, are exempt from tax under Section 10 AA of the I-T Act. This has resulted in discrimination in granting exemption in respect of assesses having units only in SEZ and assesses having units in SEZ as well as in Domestic Tariff Area. Appropriate amendment in Section 10 AA with retrospective effect is desired.

On TP and APA.

This sector has faced huge adjustments in the transfer pricing (TP) assessments. To bring in a certainty on the profits that could be taxed in a related party transaction, the Government should consider bringing industry specific safe harbour provisions and setting up of Advance Pricing Authority (APA).


ESOP, a key portion of the employee compensation in the IT-ITES sector, was brought under the purview of FBT from assessment year 2008-09. The levy is based on the value of security on the date of vesting of the option, resulting in a charge on income, which is not real. The Government should consider this situation and tax the ESOP in the hands of employees at the time of sale, as it was done earlier. This would result in only the real income being charged.

On the indirect tax burden.

On customised software as well as on renewal of licence to use software, at present both service tax and Value Added Tax (VAT) are levied. This dual levy needs to be addressed by the elimination of one. Similarly, the administration of service tax of IT-ITES exports needs a revamp. The delay in processing refunds, and denial for frivolous reasons, result in prolonged litigation, apart from cash flow problem.

Other points of interest.

The sector is currently concentrated in a few primary cities in the country. The Government should encourage extending the employment potential to secondary cities by providing appropriate fiscal incentive.

The additional allocation for e-governance would improve Governments spending on this industry. Further, non-government spending on IT-ITES should be encouraged through weighted deduction, or by providing deduction for the reserves created out of the profits to be spent on this sector in a time-bound manner.

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