IT services sector seeks much-needed relief

Written by Mahesh Jaising | Updated: Feb 25 2013, 17:37pm hrs
While the industry is eagerly waiting for Union Budget 2013-14 to be presented by the finance minister on February 28 primarily to know the Centres intention on the introduction of the Goods and Services Tax (GST) in the near future, the IT services sector is keen to see the much-needed relief from the government on various issues from the direct and indirect tax perspective.

While the sector did heave a sigh of relief in January with the CBDT circular clarifying issues relating to the export of computer software and allowance under sections 10A, 10AA, 10B of the Income Tax Act, 1961, the sector seeks relief from the wrath of the transfer pricing authorities on account of high-pitched transfer pricing adjustments, wherein the recommendations of the Rangachary Committee could bring in the much-needed relief.

From an indirect tax perspective, the key issue dogging the sector is the service tax refund paid on input services used in export of IT services. While the last Budget did see a change in the methodology of ascertaining the eligibility of refund, with the removal of the requirement of nexus between input services and output services exported, the issue remains with the procedural complexity in terms of documentation and the gap in understanding between the policymakers and the implementation by ground-level authorities, due to which refund cheques to IT service exporters are not seeing the light of the day.

In such circumstances, the introduction of a drawback scheme shall provide an alternate to the existing options to the sector, and it shall encompass a simplified scheme open to all exporters based on a standard prescribed rate on the value of export services without verification of nexus of input/output services and export status. Therefore, an exporter could claim drawback by calculating the prescribed rate on the export turnover selected by the exporter and pertaining to a particular month, quarter, half-year or year for which the drawback is claimed. A drawback rate of around 3.5% should be acceptable to the industry. In order to ensure that there is no undue benefit and to protect the revenue interests, the drawback claim could be capped to the Cenvat credit balance as on the date of issuance of the same.

The Centre could also make efforts to clear certain ground-level issues regarding pending refund claims, wherein there is a lack clarity, specifically with respect to the manner and extent of verification, post obtaining the statutory auditors certificate. A time-bound process to clear the backlog of claims would go a long way in bringing down the cost of doing business in India.

Over the last six years, the sector has seen expansion into special economic zones (SEZs), though the growth rates are slow in the recent past. While the SEZ scheme did promise significant fiscal incentives for exporters, these have been reduced on account of the method in which such incentives have actually been provided for under the respective tax statutes. A case in point being the service tax relief being provided by way of refund, with the upfront exemption being virtually ruled out for most IT services players by virtue of conditions laid down. The refund is granted proportionate to the SEZ turnover vis-a-vis the entire turnover and this significantly restricts the benefit to IT service exports. The refund should be granted in full for all services exclusively used by the SEZ unit, if an upfront exemption isnt given.

The IT sector is also hoping for relief on clarification with respect to certain activities like marketing services of foreign clients that could potentially be treated by ground-level authorities as intermediary services, and therefore, based on the proxies laid out in the regulation governing export services, be treated as liable to service tax.

While the IT sector has contributed significantly in filling the large gap of Indias external trade balance for many years and continues to do so, after the completion of the tax-holiday period for most units in 2011, the industry is facing multiple tax issues. The sector is eagerly looking forward to the Budget and hopes for the much-required relief from the Centre on these issues.

The author is partner, BMR Advisors. The views are personal. With inputs from Kunal Wadhwa, director