The year 2016 has been a challenging one for the IT sector in India. Certain political events, growing pricing pressure, newer technologies and GDP decline in key markets have affected growth. In fact, NASSCOM, in its midterm review has cut the growth outlook to 8-10% for the financial year 2016-17 as against 10-12%, which was projected earlier. With the industry going through challenging times, there is a sense of expectation of some positive measures from the budget 2017 from a taxation point of view.
From a direct tax perspective, the three important aspects that are to be addressed in the budget are reduction in tax rates, providing tax incentives and mitigating tax disputes.
Tax Rate Reduction: In 2015, the government had announced that the corporate tax rate would be reduced to 25%, while phasing out incentives, but no roadmap has been laid for the same. This needs to be addressed in the upcoming budget. Further, there should also be a corresponding reduction in the minimum alternate tax rate to ensure parity in rate reduction.
Tax Incentives: While the government focus has been on phasing out of incentives, some incentives are still provided for startups to make them viable. Similarly, the government should consider extending support to some of the other key programs such as Smart City, Make in India, Digital India, etc. Being in their nascent stage, the success of these programs largely depend on the extent of participation of private players. Tax incentive is one of the definitive initiative to encourage participation. The success of these programs are essential for the IT sector as they would increase domestic market and reduce dependency on international market.
Additionally, the government should also take measures to promote Research and Development (R&D) in the IT sector by providing tax incentives. Currently, only bio-technology and manufacturing companies are eligible for tax incentive for in-house R&D. This incentive would provide the required impetus for R&D activity in the IT sector. It would also benefit the small companies and start-ups engaged in technology and IP development in India.
Disputes mitigation and resolution: With the increasing tax related disputes and litigations, the government had set up Lahiri Committee and Easwar committee to mitigate and address tax disputes. However, there are host of taxation issues that prolong litigation with no settled position, such as cross border employee deputation, taxability of software license fee, cloud services, digital economy, etc. The government should consider bringing suitable guidelines or clarifications wherever possible and close tax disputes on critical issues.
Additionally, to ensure tax certainty for the investors, the government should strengthen the existing advance ruling mechanism. This would ensure timely disposal of the applications for advance ruling. In addition, this would facilitate the investors to know their tax implications in advance, thereby eliminating any surprises.
The IT sector has been a backbone of Indian economy and a major contributor for growth and development of our country. It would be crucial to see if the Government would recognize the challenges faced by this sector and provide appropriate measures to support the growth of the sector in this budget. Manoj Shenoy, Manager, PwC and Kunal Puri, Assistant Manager, PwC also contributed to this article
(Authored by By Pallavi Singhal, Partner – Direct Tax, PwC. Views are personal)