Budget 2024: Nasscom seeks lighter taxation environment for tech industry

Industry association wants levels for safe harbour provisions raised to enable greater participation

The Union Budget should increase eligibility thresholds under safe harbour provisions from current levels of up to Rs 200 crore in international transactions to Rs 2,000 at least, according to the National Association of Software and Service Companies (Nasscom), which represents India’s $200 billion technology industry.

Safe harbour rules or conditions relieve taxpayers from obligations typically imposed under the Transfer Pricing Regulations introduced in 2001.

“A company right now can only apply for a safe harbour margin if its international transactions are up to Rs 200 crore in a year, which means a lot of entities are left out. It is not just global capability centres (GCCs) but even in the usual IT/BPM space, companies with holdings in subsidiaries where transactions between the offshore centre, which could be a subsidiary abroad, can easily surpass the Rs 200 crore limit. This means hardly any of our industry gets to participate in the safe harbour,” said Ashish Agarwal, vice-president and head of public policy at Nasscom, referring to the information technology and business process management industry.

 

Applicable margin rates under safe harbor should be in line with global trends, according to Nasscom. It requested a margin rate of 10 per cent for IT-enabled services (ITeS) and knowledge process outsourcing (KPO) and 12 per cent for IT services, including contract research and development (R&D).

“No other country has prescribed safe harbour margins specifically for IT-ITeS under their transfer pricing laws. Globally, countries classify software development/ITeS under the category of ‘routine services,’ which has a lower mark-up (generally around 5 per cent) on such services. Even for R&D services, a maximum margin of 10-12 per cent is applied. We have looked at the US, UK, China, Poland, the Philippines, Malaysia, Israel, among other countries. We therefore need to simplify the margin rate categories in India and provide margins which are comparable to international levels,” said Agarwal.

India’s applicable margins under safe harbour for IT-enabled services are 17-18 per cent, for KPO they are 18-24 per cent, and for contract R&D 24 per cent.

Agarwal said that issues related to transfer pricing, including advanced pricing agreements (APAs), were the technology industry’s top expectations from the Budget. “What we are trying to do is to enable greater investment into the IT sector. We are looking at measures which could benefit the industry from an export perspective because in the overall environment there is a slowdown in terms of growth. So when you look at the next few years, I think just from a tax competitiveness point of view, it is essential to see that our taxes are globally competitive. In that scenario, one of the big things is the transfer pricing,” he said.

India should look at an advanced pricing timeframe similar to China's, which currently falls around six months.

“This needs work from various angles. One could be to staff more people. Also, new applications for advanced pricing agreements could be a renewal of the earlier advanced pricing agreements where not much has changed and the facts are similar. So, you could create a fast track for the renewal,” said Agarwal.

Nasscom, which also represents startups, also recommended enabling the direct listing in India of Indian-origin foreign-incorporated firms. An expert committee of market regulator Sebi has recommended that equity shares of companies incorporated outside India should be allowed to be listed on Indian stock exchanges. Its recommendations have not yet been implemented.