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Updated: February 21, 2010 19:22 IST

Tax expectations of the technology industry

D. Murali
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Abhishek Goenka
Special Arrangement Abhishek Goenka

It’s that time of the year again when expectations surrounding Budget 2010 resonate. Yet, for many specific reasons, this Budget is being watched keenly, says Abhishek Goenka, a partner in BMR Advisors’ corporate tax practice, leading the firm’s technology industry practice.

The main reason for the special interest about the Budget is that it comes on the heels of the national and global sound-bites surrounding economic recovery and, therefore, people are looking for signs that the Budget will provide on the continuation or otherwise of the fiscal stimulus, adds Abhishek, in the course of a recent pre-Budget email interaction with Business Line.

“The other reason, of course, is that the Government’s fiscal deficits are no cause for envy and, as has been the case now for the last few years, balancing populism with prudence will be crucial.”

Mr Pranab Mukherjee brings a unique combination of crucial financial acumen, astute political understanding and the ability to carry people along, opines Abhishek. And hopes that “all these skills are equal ingredients in the FM’s melting pot.”

Excerpts from the interview.

On tax issues.

On the tax front, the existing direct tax rates are expected to continue. The excise and customs duty rates and that for service tax could be increased marginally if there is a clear messaging on withdrawal of fiscal stimulus.

With the Direct Taxes Code (DTC) likely to take some more time, the Government would do well if tax base broadening measures are introduced. In terms of structural changes to the direct tax law, clarity on a few fairly basic matters is desired.

One of the long-standing asks of the IT industry is clarity on software taxation. While the Revenue officers have been treating payments for software products as royalty, the tax Tribunals have been holding these as business income. The Karnataka High Court threw a spanner in the works by giving a new twist to the whole software issue, when it said that all payments to non-residents (be it for goods or otherwise) require tax withholding at source.

While the Supreme Court is likely to give its verdict soon on this issue, a clarification to this effect in the tax law would be welcome since withholding tax is a starting point of tax administration and collection and there is no merit is uncertainty and complexity on that front.

The FM’s recent comments on transfer pricing notwithstanding, this has been one of the most game-changing amendments in the law in the last decade. As we enter the next one, it is time to address some structural concerns.

Much to the delight of taxpayers, Budget 2009 introduced the safe harbour provisions. However, like most other structural changes, the safe harbour amendment is still largely in cold storage as the Rules to give effect to the amendment are yet to be introduced and investors with captive centres in India are still grappling with transfer pricing litigation in India with crores of revenue locked up.

On LLPs.

While for tax purposes, LLPs (limited liability partnerships) are by and large given the same tax treatment as partnership firms, there still appears to be a dichotomy in Government’s stand insofar as tax treatment of LLPs is concerned.

When it comes to presumptive taxation, partnership firms qualify, but LLPs don’t. As regards tax holiday for industrial undertakings, etc. (section 80-IA), companies qualify, but LLPs don’t.

Lack of clarity on FDI in LLPs only adds to the complications. LLPs provide clear advantages as a vehicle of doing business and that calls for complete clarity on the topic, both on the tax and policy side.

On the tax policy matters.

On the tax policy front, a reinforced messaging and more importantly a commitment on the timelines for the introduction of GST and the DTC should be at the forefront.

Although inconsistent with the larger objectives of pulling back on tax holidays, it will be a measured dose if the tax holiday for the IT industry, currently set to expire on March 31, 2011, is extended selectively, at least for the SME sector. This will balance the Government’s need for more revenues and also help in providing fiscal stimulus to the smaller units.

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