After constituting the Parthasarathi Shome committee earlier this month to look into the controversial GAAR (General Anti-Avoidance Rules) provisions and address the thorny issues to the satisfaction of foreign investors and all other stakeholders, Prime Minister Manmohan Singh, on Monday, set up yet another panel to bring about clarity on taxation matters pertaining to development centres and the IT sector. In a statement here, the Prime Minister’s Office (PMO) said that a four-member panel headed by former CBDT (Central Board of Direct Taxes) Chairman N. Rangachary would hold consultations with stakeholders and government departments concerned to finalise the approach to taxation of ‘Development Centres’ and suggest appropriate measures.
Apart from Mr. Rangachary, the other two members are: Director General (Income-tax) Anita Kapur, and the Director of Income-tax (Transfer Pricing), Rashmi Sahani Saxena, while the third would be any other officer from the I-T Department to be co-opted by the Chairman. Incidentally, Mr. Rangachary is also a member of the expert committee on GAAR headed by Dr. Shome.
The statement pointed to an “overwhelmingly positive” response of stakeholders to engage in a widespread consultation process for finalising the GAAR guidelines and said: “While this [Shome] committee would address concerns on GAAR provisions and would reassure investors about the predictability and fairness of our tax regime, it was felt that there is still a need to address some other issues relating to the taxation of the IT sector such as the approach to taxation of Development Centres, tax treatment of “onsite services” of domestic software firms, and also the issue of finalising the Safe Harbour provisions announced in Budget 2010”.
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Explaining the need for providing tax clarity in this regard, the statement noted that many MNCs carried out activities such as product development, analytical work and software development through captive entities in India and existed in a wide range of fields, including IT software and hardware, and research and development (R&D) in sectors such as pharmaceuticals, automobiles and other scientific areas which were popularly called Development Centres. Over 750 MNCs have such centres at over 1,100 locations in the country.
The reason for this large concentration of development centres, the PMO pointed out, was the worldwide recognition of India as a place for cost-competitive, high quality knowledge-related work and these centres provided high quality jobs to scientists and made the country a global hub for such knowledge-based activities. “However, India does not have a monopoly on development centres. This is a highly competitive field with other countries wanting to grab a share of the pie. There is need for clarity on their taxation,” the statement said.
With regard to ‘Safe Harbour’ provisions in keeping with international disclosure practices to check litigations in transfer pricing, the statement noted that although these were announced in the Finance Bill, 2010, they were yet to be operationalised. “Safe Harbour provisions have the advantage of being a good risk mitigation measure, provide certainty to the taxpayer,” it said.
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As for timelines, the Rangachary panel has been directed to finalise the approach to taxation of Development Centres and the IT sector by August 31 this year with suggested clarifications and changes that may be needed to remove ambiguity and provide clarity on taxation of the IT sector.
According to the statement, the committee will finalise the Safe Harbour Rules individually, sector-by-sector, in a staggered manner and submit draft provisions for three sectors/sub-activities each month starting September 30. All Safe Harbour provisions are expected to be finalised by December 31, 2012.
“The overall goal is to have a fair tax system in line with best international practices which will promote India’s software industry and promote India as a destination for investment and for establishment of Development Centres,” the statement said.