IT companies, under pressure to pay tax on income from sending engineers abroad to assist foreign software clients, have asked the N Rangachary panel to classify such income as software export receipts that are deductible while computing taxable income. Such a relief, if granted, will benefit IT firms operating from special economic zones who continue to enjoy a tax holiday subject to conditions.
Until 2010-11, IT firms were allowed to deduct their entire software export income from taxable profits but many of them were asked to pay income tax on revenue from sending personnel abroad in previous years as the authorities considered it as manpower export or body shopping rather than software exports.
Infosys, which is contesting a tax order in this respect believes the uncertainty over this is a distraction when the IT sector is already affected by the global slowdown. CFO V Balakrishnan told FE: ?The uncertainty will definitely have an impact on the industry. This increases administrative and litigation costs for the company and is a huge distraction in business when the industry is being challenged by the uncertainty in global markets.?
?A clarification on the taxation of onsite services is relevant not only for past tax demands but also for the future. Lack of clarity on this could lead to more disputes in the future,? said Vipul Jhaveri, partner and head, M&A Tax, Deloitte Haskins & Sells.
The Rangachary panel appointed by Prime Minister Manmohan Singh to draft a new approach to taxation in the IT sector is expected to advise the government shortly.
In the case of Infosys, disallowance of the tax break happened when assessment orders were issued for fiscals 2007 and 2008. Infosys, which was asked to pay about Rs 450 crore tax when the authorities decided to deny the tax benefit under section 10A and 10AA of the Income Tax Act to ‘onsite services’, contested the demand and appealed to Commissioner of Income Tax (Appeals). This appeal is still pending. Sending engineers abroad to assist clients to install software and to train the customer?s staff account for more than 30% of the income for many IT firms. Wipro and TCS too have reportedly come under scrutiny.
Balakrishnan said that onsite services were integral to the software development cycle for the clients. Companies say the tax scrutiny comes in spite of a CBDT circular clarifying in 1994 that ?onsite? services should not be denied the tax benefit of software exports so long as the software is produced by the IT company.
?This issue not only impacts the earnings of the company, but also sends a wrong message to the industry as well as global clients. There is a need for deliberations on the ambiguity that prevails, which we hope the government will consider at the earliest,? said Anupam Khannna, chief economist, Nasscom.
Although the tax benefit for software exporters under section 10A of Income Tax Act ended more than a year ago, many IT firms operating from special economic zones continue to enjoy the tax holiday. SEZ units coming up until March 2014 do not have to pay any income tax for first five years and then need to pay tax only on half of their export income for another five years if half the profits are reinvested.