Countdown to Budget 2017: Expectations for Information Technology sector

The IT sector is an export-led sector, as well as a flag bearer of the innovative tech startups.

Updated: Jan 23, 2017 03:40:27 PM UTC
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(Image: Shutterstock: For illustrative purposes only)

Backdrop

While 2016 was a challenging year for the global economy, India emerged as the fastest growing economy in the world – even amid persisting uncertainty.  At this juncture, it remains imperative that precedence is given to impetus for growth.  Weak investments and subdued demand conditions post demonetisation remain major concern areas.

The IT sector has grown multi-fold in revenue terms over a decade and continues to be the largest private sector employer in the organized sector, with an aggregate revenue of USD 143 billion with exports touching USD 108 billion, growing by 8.5 per cent over 2015 (as per Strategic Review 2016 by NASSCOM). The sector is estimated to contribute over 9.3 percent of India’s GDP and over 45 percent of total services export.  The sector is an export led sector, as well as a flag bearer of the innovative tech startups.

Considering the run up to Union Budget 2017, the expectations of ‘feel-good’ factors being featured in the Budget proposals are pretty high.  A few more tax and policy initiatives are required to shore up sentiments among investors, both domestic and foreign, which could be done by introducing additional incentives under Government’s key projects, such as, Skill India, Make in India, Start-Up India, Digital India, etc.

Key expectations of the sector from Union Budget 2017-18 are as follows:

Policy reforms

• Announcement of further measures to encourage digital payments in line with Government’s intention to move towards a cashless economy.

• Continue the focus on ‘ease of doing business’ and thrust on development of technological infrastructure.

• Fostering digital literacy, improved connectivity and access to technology supported by radical government process re-engineering and larger budgetary allocation for such initiatives.

• Introduce single window mechanism for MSMEs that serves as one-stop shop service for all business related compliances, with in-built provisions for time bound and deemed clearances.

• Continued support to Start-ups under the Start-up India initiative.

Direct tax

• Roll out the roadmap for reduction of rate of tax from 30 percent to 25 percent.

• Restate the rate of depreciation on computer and computer software to 60 percent from 40 percent.

• Extend weighted deduction incentives for (a) research and development expenses, and (b) skill development expenses by including ‘software development / IT’ in the relevant definitions, given the importance of such expenditure for the sector.

• Include the software development / IT services industry in the definition of ‘eligible undertaking’ for carry forward of losses / depreciation during mergers (currently available only to industrial undertakings, ships and hotels).

• Grant tax credit for Equalisation Levy to foreign companies by entering into reciprocal agreements with countries that impose similar levies to avoid situation of double taxation.

• Clarify the exclusion of standard payments, such as, routine telecommunication / connectivity charges, payments for shrink wrapped software, etc from definition of ‘royalty’ (this is in line with conventional and acceptable international standards).

• Reduce withholding tax  rate of 10 percent on payments to SMEs and Start-up software companies, given the low margins in the sector.

• Reduce the margins under the transfer pricing safe harbour rules (currently, between 20 to 30 percent) to help SMEs.

• Exempt foreign companies receiving passive income, like royalty and fees for technical services (subjected to withholding tax under tax treaty), from filing a return of income in India and related compliances.

Indirect tax

IT Hardware

• Government’s ‘Make in India’ initiative has provided significant boost to mobile phone production in India.  The industry is expecting the ambit of ‘Make in India’ to be widened by offering similar benefits for manufacture of other IT products, such as, laptops, notebooks and desktops. While the benefit may be short lived under the pre-GST regime, it is expected that the ‘Make in India’ initiative may be grandfathered into GST.

• The list of consumer premise equipment which enjoys duty differential under ‘Make in India’ to be made more comprehensive to cover products, such as, networking switches, USB adapters, etc.

IT / ITeS services

• Clarify that transfer of funds from head office located in India to branch office located outside India and vice versa for meeting day to day expenses should not be subject to service tax.

• Clarify that software development / testing services involving usage of prototypes / goods provided by the service provider are covered under Rule 3 of Place of Provision of Services Rules, 2012.

Some of the above expectations reflect long standing demands of the sector and it is expected that the Government should heed to these requests as these are simple asks and will go a long way in improving the ‘ease of doing business’ index for the sector.

(Views expressed are personal.)

The thoughts and opinions shared here are of the author.

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