Keeping the battering of economic downturn in 2009 at bay, Indian IT (information technology) companies are quite optimistic about the business outlook in 2010 and are banking on sustained recovery and eventual job creation, observes Naveen Aggarwal, Executive Director, KPMG.

“According to industry analysis, the software services and business process outsourcing (BPO) export revenue is projected to grow at 13-15 per cent in the next financial year (2010-11) as against a modest growth of 5.4 per cent in 2009. The domestic market is projected to grow at a healthier rate of 15-17 per cent,” he adds, during the course of a recent pre-Budget email interaction with Business Line.

Aggarwal finds it noteworthy that the domestic sector in the past year witnessed an increase in Government IT spending, with various e-Governance projects being implemented across the country, recognising the importance for technology adoption/ up-gradation across various Government departments.

“The absorption and enactment of e-Governance policies will create an inherent need and large opportunity for the IT industry to create an effective partnership that can help the country leapfrog digital inclusion. One of the projects initiated by the Government is the multipurpose National Identity Card or the Unique Identification card (UID Card) project.”

However, to achieve the projected growth rate in the midst of evolution of other competitive jurisdictions and protectionist policy of some western countries, the IT and BPO sector requires significant support from the Government in the upcoming Budget 2010, feels Aggarwal.

Excerpts from the interview.

On tax holiday.

On top of wish list is the extension of tax holiday under Section 10A /10B which is set to expire on March 31, 2011. Software Technology Parks of India (STPI) is a pro-small and medium business scheme, and SEZ is a pro-large business scheme.

For development to happen across the country and for young new entrepreneurs and new entrants to be as successful as bigger companies, the sector is hoping that the Budget will extend tax benefits beyond 2011.

On ESOPs.

Though the removal of FBT on ESOPs in the last Budget is a welcome step, the current tax regime on taxability of ESOPs as a perquisite on allotment is not considered employee-friendly.

The industry expects that rules similar to pre-FBT era should be introduced wherein employees were not taxed at the allotment stage but only when they sold their shares at a later date. Further, the CBDT should clarify the taxability of equity-based benefits in case of internationally mobile employees, as was done under the FBT regime.

On royalty vs business income.

An area of ambiguity has been the taxability of income from cross-border supply of software as royalty versus business income. While there are several judicial precedents supporting taxability as business income, a suitable clarification from the Government would go a long way to resolve disputes and corresponding hardships to taxpayers.

On overseas payments.

Recent judicial developments on withholding tax applicability for all overseas payments have caused unwarranted confusion and hardship for the industry.

The courts have taken a view that approaching the tax authorities for obtaining a certificate is necessary for all overseas payments even where the payments are not taxable in the hands of non-resident.

The industry is expecting some clarity in the forthcoming Budget whereby present system of obtaining a CA (chartered accountant) certificate for effecting foreign remittances shall be regarded as sufficient compliance.

On indirect taxes.

On the indirect taxes front, removal of dual levy of service tax and VAT/ CST on provision of right to use software is an important demand of the sector. Given that differential tax treatments are accorded to customised software and packaged software, industry is hopeful that this Budget will lend clarity to the meaning of these terms.

The BPO sector is also concerned on the ambiguity in the manner in which export rules have been worded. In terms of these rules, BPO services qualify as exports (and hence not liable to service tax) if they are inter alia ‘used’ outside India.

While there have been attempts in the past by the Government to clarify the situations where services would be construed to be used outside India, authorities particularly at the lower level are still raising disputes in apparent disregard of the governmental clarifications. It is expected that this Budget will introduce suitable changes in the export rules itself so as to remove these ambiguities.

Even where export of services is accepted, companies go through an extremely cumbersome process while obtaining refund of service tax paid on inputs involving stiff documentation verification requirements, longstanding pending claims and litigation. Some recent clarification seeks to streamline this process; however, certain pre-conditions such as obtaining certificates from the statutory auditor need further relaxation to simplify the process.

Interestingly, the term ‘export’ for SEZ purposes is also considered differently under the SEZ law and the income-tax law. Whereas the SEZ law considers provision of goods and services from SEZ to domestic tariff area as exports, the income tax law restricts exports to ‘sale of goods outside India’. The scope of ‘export’ under both laws needs to be harmonised to avoid litigation.

On safe harbour provisions.

The 2009 Budget had announced the intent of the Government to roll out safe harbour provisions. These provisions, which are still awaited, will hopefully address this issue and also reduce compliance costs for the IT and BPO sectors.

This together with advanced pricing agreements (APA) and effective functioning of the dispute resolution panels (DRP) should provide a favourable environment for further foreign investment in this sector.

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