BUSINESS BUZZ The IT SMEs, especially those located in the Special Economic Zones, are facing severe hardships due to Minimum Alternative Tax, complex Transfer Pricing procedures and Service Tax issues

As the date for presentation of budget in the Parliament is drawing closer, IT and IT enabled Services industries under the small and medium enterprises category are anxiously waiting for Union Finance Minister P. Chidambaram to announce positive measures that can sustain their scale of operations.

The IT SMEs, especially those located in the Special Economic Zones, are facing severe hardships with the Central Government’s decision to introduce Minimum Alternative Tax, complex Transfer Pricing procedures and Service Tax issues. The three major concerns, the MAT and the Transfer Pricing in particular, are resulting in tighter margins for the small enterprises that are already faced with tough competition.

The industry started feeling the pinch with decline in employment generation as also the reluctance of the foreign investors to put their money here, according to the ITsAP. MAT pegged at a high of 18.5 per cent for the SMEs was introduced last year against the assurance of tax free status in the SEZs for 15 years.

“A majority of these units are yet to hit the profit line and several of them are in the application development stage. Levy of tax in the form of MAT on these units is hitting their margins,” said ITsAP treasurer Padmaja Chowdary. The ITsAP has urged the Centre to rollback Minimum Alternate Tax or reduce it to five per cent that for the SMEs to sustain their operations. A bigger issue that is facing these units is Transfer Pricing regulation that was more complicated and complex to implement.

Assessment of transfer pricing based on margins of the parent company outside the country is one major impediment even as the top executives of the local subsidiary are being made to frequently visit the arbitrators’ offices to resolve the pending issues. “The process involves significant costs to the units. Moreover, senior executives are unable to function effectively as the arbitration issue keeps lurking at the back of their minds,” Ms. Padmaja said.

Coupled with this was the tax authorities’ reluctance to consider litigations resolved in cases of same nature as yardstick to settle similar cases expeditiously.

The kind of documentation that has to be maintained is cumbersome, time-consuming and associated with high costs. “Such litigations are counter-productive and could hamper the growth of the industry. We want the Central government to introduced simpler transfer pricing norms,” she said.

The ITsAP, in its memorandum to the Centre, said under the present IT laws, business losses can be forwarded only for a minimum of 10 years and the same should be allowed to carry forward without any limitation. This was necessary as recouping losses in 10 years’ time may not be possible in the event of down turn in economy.

The Confederation of Indian Industry too suggested withdrawal of MAT on SEZs and wanted the Government to initiate a new SEZ policy facilitating accelerated growth in IT exports. Besides, efforts should be made to evolve and implement a policy for giving fillip to research and development in software and promoting the industry in the Tier-II/III towns for inclusive growth.