Reeling under the impact of growing protectionism globally, the about $150-billion Indian software industry has sought reduced tax rates, resolution of issues under the GST regime and a comprehensive review of the foreign tax credit provisions to maintain its global competitiveness, among others, in the upcoming Budget.

“India was an importer at the time when the Foreign Tax credit law was drafted … The law today needs to be reviewed from the perspective of exporting companies, as the IT sector stands today,” industry body Nasscom has said in its recommendation to the Finance Ministry. “Indian firms operating in the global environment should not be at a disadvantage just because they are leading India’s economic march on the world stage,” it added.

TDS rate
It pointed out that to ensure ease of doing business; there was a need to reduce the rate for tax deducted at sourceon all software payments. Last year, TDS was reduced to from 10% to 2 % for payments made to call centres.

“We request that this provision be extended to all software transactions. Our request is driven by the fact that margins are under pressure. For small companies, margins are further reduced, and a high TDS impacts cash flow,” it said.

The industry body added that Income tax rate rationalisation promised by the Government, in view of phasing out of tax incentives has yet to happen. “We repeat our request for a roadmap for tax rate reduction in a phased manner.” The National Association of Software and Services Companies (Nasscom) further said legislative and procedural issues of the sector under the GST ought to be resolved.

The challenges for the IT sector arise because a single IT service contract may have multiple locations from where or to which an intangible output may be delivered — be it domestic or exports. Compliance with GST norms could involve raising of separate invoices at each location from where the service is provided, it said.

It said even where a single invoice is raised, it gives rise to inter-branch or location billing. Further, such services need to be valued and GST discharged thereon, resulting in blockage of working capital.

“Hence, from an IT services perspective, there are several implementation challenges under the GST regime which impact export competitiveness, leading to likely disputes related to determination of place of supply, blockage in working capital due to self-supplies, treatment of Head Office Branch office transactions etc. This is especially important, bearing in mind that nearly 80% of the turnover is export related,” it said.

Indian start-ups are expecting the upcoming Budget to address the “discriminatory treatment of Indian investors”.

Nasscom pointed out that long-term capital gains from sale of unlisted shares in the hands of non-residents attracts 10% tax whereas it attracts 20% in the hands of residents.

Noting that angel investors come in at the earliest stage of the company with the highest risk, the industry body said imposing angel tax on start-ups has a direct impact on them as it taxes investment they have received from domestic investor.

As per Section 56(2)(viib) of the I-T act, the valuation of start-ups that have no revenues or profits is based on the potential and promise of the idea, the background and competence of the founding team, and is usually a matter of negotiation between founders and angel investors. “As this section applies only to domestic investors, it discriminates against them as compared to foreign investors who are not subject to this clause.”

As per Nasscom, the levy of this tax has resulted in a 53% decline in angel funding during the first half of 2017.