IT companies say new norms on SEZ will only raise bureaucratic burden

Written by P P Thimmaya | Bangalore | Updated: Aug 18 2014, 06:46am hrs
IT majors, including Infosys and mid-sized players like Mindtree, and tax experts have termed the latest circular from the Central Board of Direct Taxes (CBDT) on special economic zones (SEZs) as a measure which would only increase their bureaucratic burden leading to many irksome issues.

Click here for graph

The Indian IT industry is also critical of the circular for its failure to understand the operational nuances of the sector. Responding to a query from FE, Infosys in a statement said, The CBDT circular provides clarity on the issue of transfer of employees from DTA to SEZ units in the years of formation. However, the circular specifies that a percentage of restriction on transfer of employees is applicable at any point of time in the given year. This would be a tedious process and would create tremendous hardship on the companies to maintain records to the satisfaction of the assessing authorities.

A TCS spokesperson declined to participate in the story saying that it was the company's policy not to comment on taxation-related issues. Questionnaire sent to Wipro and HCL Technologies on Thursday did not elicit any response.

The CBDT circular had clarified that the IT companies can only transfer 20% of their existing employees to an SEZ while the remaining 80% will have to be fresh hires to avail of income tax benefits. Talking to FE, Rajiv Chugh, partner, tax & regulatory services, Ernst & Young, said, This 80:20 rule is a retrograde step which is not practical to implement."

Chugh says that the IT industry is very dynamic in terms of people movement and it is difficult for companies to keep a constant tab on the 80:20 ratio. NC Hegde, partner, Deloitte Haskins & Sells told FE that under the original SEZ Act, the 20% cap was only on the plant & machinery, and there was no restriction on the movement of people.

According to the commerce ministry statistics, the IT sector has the largest share of the SEZ pie in India, with formal approvals to the tune of around 60%. The Indian IT industry, with export revenue of $86 billion employing over three million people, witnesses a constant churn of employees with attrition rate being anywhere between 10 and 15%. The circular has also brought under its ambit BPO companies, where the attrition rate is much higher.

Rostow Ravanan, chief financial officer, Mindtree,said, The whole premise of SEZ is of creating employment, so why have this sub-limits now within a scheme which is already operational. The SEZ Act was passed in Parliament in 2005.

The IT industry fears that the circular might increase income tax disputes leading to more litigations. There is a likelihood that some of them would challenge this in the courts, industry observers said. Infosys has said, We would suggest that the transfer percentage be applicable as at the end of the financial year in which the SEZ unit commences its business operation.

The Indian IT industry was availing a 100% I-T exemption under the software technology park (STP) scheme, which came to a close in 2011. Under this scheme, companies could avail this benefit for ten years or till 2011, whichever was earlier.

This triggered the move by IT companies to move into SEZs subject to meeting of certain conditions like setting up the new units in the designated zones, minimum land area requirement, stipulation of getting new business etc. These SEZ units received 100% income tax exemption during the first five years of operations which was then lowered to 50% in the next five years.

This shift from STP to SEZ has also increased the effective tax rates for the IT companies. For instance, Tata Consultancy Services in its annual report for FY14 said that the effective tax rate went up from 18.57% in FY13 to 21.53% and this has been attributable to two reasons: 1) increase in corporate tax in India due to increase in surcharge from 5% in fiscal 2013 to 10% in fiscal 2014 and 2) certain SEZ units in India entering the second phase of the tax holiday where tax benefit is restricted to 50% of the first phase of five years.