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Even as the income tax department has come out with a bunch of clarifications concerning the information technology (IT) sector in the last few months, this might be too little to assuage the litigation-ridden IT companies.
After setting up a committee under N Rangachary last year to look at taxation issues regarding the sector, the government has issued several notifications in the last eight months. However, according to experts, the government has been successful in addressing only a handful of issues such as whether services rendered at onsite locations can qualify for export sops, while a majority of them such as service tax refunds, transfer pricing, software royalty still remain.
In the last couple of years, both Indian and multinational technology firms have been slapped with a slew of tax notices. According to rough estimates of the industry IT body, Nasscom, while Rs 10,000 crore is stuck in transfer pricing disputes, another Rs 3,000 crore is pending through service tax refunds.
In the recent past, taxation woes for the corporate sector have piled up, forcing some companies to state upfront that working in India is getting difficult for them with the recent case being that of Nokia. “The rupee has gone above 65 and the government is telling investors to have confidence in the country, but why will they? We as a country have messed it up ourselves by creating such a litigative atmosphere,” said K Venkatachalam, executive director, tax and regulatory services at consultancy firm PwC India.
Based on the recommendations of the Rangachary committee, the government clarified in January this year that software developed abroad at a client’s place would be deemed exports and thus eligible for tax benefits. It also said income from deputation of manpower for such on-site work would be allowed for tax benefits. This came after several Indian software services export companies such as Wipro, Infosys and iGate were handed out tax notices over the last couple of years.
While the notification managed to set the record straight on how the business model of IT companies has to be interpreted in lieu of the act, there are “pockets of implementation” issues which remain. According to Venkatachalam, though the government has issued clarifications on the subject, the assessing officers are not taking cognizance of it. “The first of the appeals against these companies are stuck at various dispute resolution panels and since there has been no relief yet from that level, assessing officers are not ready to acknowledge it which may lead to more tax demands,” said Venkatachalam. However, the intent of the law is good to cut off frivolous litigation, he added.
The finance ministry later came out with two circulars to define development centres and on the application of the profit split method (PSM). However, since there was large-scale misinterpretation that PSM could be considered the default method of transfer pricing for contract research and development centres, the government later revoked the circular on PSM and amended the one definition of development centres to make it clearer. The move was cheered by the industry but the recent safe harbour draft recommendations have again put worry sign on the industry’s forehead with most of its recommendations not going down well with the industry.
A majority of the litigation around transfer pricing concerns IT multinationals and it has been a long-pending demand of the industry to bring some clarity on it.
Bishakha Bhattacharya, director of government relations at Nasscom, said service tax refunds was a major issue for the industry and almost all companies were impacted by it. The industry is supposed to get refund for the service tax paid for all the input costs, which lead to exports. However, there are disputes on what qualifies and how to establish links between the two. “Most of the demands for refunds are either getting rejected or are pending.”
Bhattacharya added the definition of software royalty was also not aligned to the international definition of it and there was a duality of taxation with both service tax and value-added tax levied on it.
“Small and medium companies are also suffering due to the implications of the 10 per cent tax deducted at source mandate on all software transaction which is chocking their cash flow,” added Bhattacharya.
She added, however, the government’s intent to resolve the issues is clear from the formation of the Rangachary committee and the tax administration reforms commission under Parthasarthy Shome and the industry would continue its consultative process with the government at various levels to resolve these issues.
