IT-industry wishlist
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Tuesday February 22, 2011 10:16 pm PSTThe 2011 budget comes at an important juncture for the IT industry.
The latter half of 2008 and the first half of 2009 saw the industry struggling because of the weakness in the markets of the end-customers that this industry serves. There has been a recovery in the latter half of 2009 and 2010 and the industry is gathering momentum. Some of the critical issues that the industry faces from a tax perspective and the desired outcomes from an industry perspective are listed below:
1. Extension of income tax holiday under section 10A: Income tax exemption on profits of Export-oriented units expires on 31.03.2011. It is requested that this exemption is extended for one more year upto 31.03.2012, when the new Direct Tax code will kick in. This will help the IT industry to maintain the growth momentum this year and compete with other Asian countries that are providing SOPs like tax incentives to attract investments from MNCs.
2. Clarifications on eligibility of SEZ units for tax holiday u/s 10AA: Income tax holiday for SEZ units is subject to condition that the unit is not ‘formed' as a result of ‘splitting-up or reconstruction of an existing business', with a 20% threshold for transfer of used equipment. IT companies with existing STP units that set-up new SEZ units tend to transfer some employees and business/projects to new SEZ unit for operational convenience and efficiency. There is uncertainty on whether this leads to violating the above condition which may result in denial of tax holiday. Government could clarify on the threshold limits for upto which people and projects can be transferred to continue to be eligible for the tax holiday.
3. MAT rate: MAT rate has increased sharply from 10% in 2009 to 18% for 2010-11 and works out to almost 20% including surcharge and cess. This affects cashflows of IT companies. It is suggested that Government can re-look and reduce the MAT rate back to 15%.
4. Marked-to-Market (‘MTM') losses: IT companies primarily into exports hedge their foreign exchange exposure by purchasing derivative contracts. Accounting standards require that MTM losses on outstanding contracts are recognized at the end of the year. A March 2010 CBDT Instruction has mentioned that these losses are ‘contingent and notional' and hence should not be allowed as a deductible expense while computing taxable income. MTM losses are real losses and computed in a scientific manner and should be allowed as a tax deduction. The CBDT Instruction has created uncertainty and is conflicting against some recent judicial decisions on this matter. Government should consider withdrawing this instruction and clarify.
5. TDS on purchase of software: Tax authorities are taking a view that purchase of software license like Microsoft licenses are in the nature of ‘Royalty' for TDS purposes, though there are several Tribunal rulings that have ruled that such licenses are limited license on ‘copyrighted products', and not a ‘right to the copyright', akin to purchasing a book. This has resulted in unnecessary tax disputes, for which Government could provide FAQs on which instances of software license agreements TDS would apply.
6. VAT and service tax on purchase of software: Normally, VAT applies on sale of goods while service tax applies on services. Inclusion of software services under service tax in 2008 has resulted in applicability of both VAT and service tax on software licenses in most states, that has increased the cost of doing business for the domestic software industry. Though GST seeks to overcome this issue, Government should clarify on applicability of either VAT or service tax on each type of purchase of software licenses.
7. Service tax issues for SEZ units: Services rendered to SEZ units by non-SEZ units are exempt only when the services are "consumed wholly" within the SEZ - otherwise SEZ units have to go through refund route. Disputes on whether the input services are "consumed wholly" within the SEZ - very difficult to establish especially in IT industry where the services can be rendered from any location - creates practical issues. Refund route is too cumbersome and results in cash flows being blocked. It is suggested that Input services towards authorized operations of the SEZ unit should be exempt from service tax.
source: yahoo
Tuesday February 22, 2011 10:16 pm PSTThe 2011 budget comes at an important juncture for the IT industry.
The latter half of 2008 and the first half of 2009 saw the industry struggling because of the weakness in the markets of the end-customers that this industry serves. There has been a recovery in the latter half of 2009 and 2010 and the industry is gathering momentum. Some of the critical issues that the industry faces from a tax perspective and the desired outcomes from an industry perspective are listed below:
1. Extension of income tax holiday under section 10A: Income tax exemption on profits of Export-oriented units expires on 31.03.2011. It is requested that this exemption is extended for one more year upto 31.03.2012, when the new Direct Tax code will kick in. This will help the IT industry to maintain the growth momentum this year and compete with other Asian countries that are providing SOPs like tax incentives to attract investments from MNCs.
2. Clarifications on eligibility of SEZ units for tax holiday u/s 10AA: Income tax holiday for SEZ units is subject to condition that the unit is not ‘formed' as a result of ‘splitting-up or reconstruction of an existing business', with a 20% threshold for transfer of used equipment. IT companies with existing STP units that set-up new SEZ units tend to transfer some employees and business/projects to new SEZ unit for operational convenience and efficiency. There is uncertainty on whether this leads to violating the above condition which may result in denial of tax holiday. Government could clarify on the threshold limits for upto which people and projects can be transferred to continue to be eligible for the tax holiday.
3. MAT rate: MAT rate has increased sharply from 10% in 2009 to 18% for 2010-11 and works out to almost 20% including surcharge and cess. This affects cashflows of IT companies. It is suggested that Government can re-look and reduce the MAT rate back to 15%.
4. Marked-to-Market (‘MTM') losses: IT companies primarily into exports hedge their foreign exchange exposure by purchasing derivative contracts. Accounting standards require that MTM losses on outstanding contracts are recognized at the end of the year. A March 2010 CBDT Instruction has mentioned that these losses are ‘contingent and notional' and hence should not be allowed as a deductible expense while computing taxable income. MTM losses are real losses and computed in a scientific manner and should be allowed as a tax deduction. The CBDT Instruction has created uncertainty and is conflicting against some recent judicial decisions on this matter. Government should consider withdrawing this instruction and clarify.
5. TDS on purchase of software: Tax authorities are taking a view that purchase of software license like Microsoft licenses are in the nature of ‘Royalty' for TDS purposes, though there are several Tribunal rulings that have ruled that such licenses are limited license on ‘copyrighted products', and not a ‘right to the copyright', akin to purchasing a book. This has resulted in unnecessary tax disputes, for which Government could provide FAQs on which instances of software license agreements TDS would apply.
6. VAT and service tax on purchase of software: Normally, VAT applies on sale of goods while service tax applies on services. Inclusion of software services under service tax in 2008 has resulted in applicability of both VAT and service tax on software licenses in most states, that has increased the cost of doing business for the domestic software industry. Though GST seeks to overcome this issue, Government should clarify on applicability of either VAT or service tax on each type of purchase of software licenses.
7. Service tax issues for SEZ units: Services rendered to SEZ units by non-SEZ units are exempt only when the services are "consumed wholly" within the SEZ - otherwise SEZ units have to go through refund route. Disputes on whether the input services are "consumed wholly" within the SEZ - very difficult to establish especially in IT industry where the services can be rendered from any location - creates practical issues. Refund route is too cumbersome and results in cash flows being blocked. It is suggested that Input services towards authorized operations of the SEZ unit should be exempt from service tax.
source: yahoo
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