Budget Expectations: Naveen Aggarwal, KPMG
Naveen Aggarwal, Executive Director, KPMG, shares his expectations from the Union Budget 2011 with CXOtoday.com
In recent pre-budget meets, there has a strong appeal from the industry for a reduction in the corporate tax rate from 30% to 25%. While the DTC bill has proposed the corporate tax rate of 30% for domestic companies, it seems unlikely that the Finance Ministry will consider a lower rate. However, a fair expectation would be abolition of surcharge and education cess, to limit the effective tax rate to 30% instead of 33.22%, in line with the tax rate under the DTC bill.
The tax holiday benefits for Software Technology Parks (STP)/ Export Oriented Undertakings (EOU) units are set to expire on 31 March 2011. In view of the deferral of the DTC enactment to 31 March 2012 (delayed by one year), the industry expects an extension of the tax holiday for STP/EOU units for at least one more year. This extension would be especially useful for small/ medium enterprises, which operate on lower margins and are unable to set up units in Special Economic Zones (SEZs).
Indian IT companies have significant transactions with non-residents abroad with respect to hardware/software purchases, bandwidth, etc. Over the last one year, several conflicting judicial precedents had led to uncertainty on requirement to withhold taxes on payment made to non-residents, irrespective of the taxability of such payments. Separately, while the issue on taxability of software was largely settled by various court rulings, it was unsettled by a recent decision. The debate on characterization and the taxability of amount received from overseas supply of software as royalty vis-à-vis’ business income has now become controversial. It would be useful if the forthcoming budget could clear the ambiguity on this issue.
Further, while the Advance Pricing Agreements (APA) are set to be introduced under the DTC which provides for upfront determination of arm’s length price in international transactions with associated enterprises, it will be useful to accelerate the process and implement this earlier through the Finance Budget 2011 to put to rest the rigors of litigation on the issue of arm’s length principle.
The IT and BPO sector has been facing the brunt of double taxes – VAT v. Service tax, Excise v. Service tax for quite sometime. Therefore, the up-coming Budget should resolve these long awaited industry issues.
Currently, both Service tax & VAT is levied on ‘right to use’ software, maintenance contracts, etc. It needs to be settled which of the two taxes will be levied on such transactions. Even if it is decided that both Service tax & VAT will apply, then clear valuation mechanisms will be helpful to avoid double taxation on the same value of transactions.
Recently, the service tax exemption in relation to right to use packaged or canned software has been granted if Excise duty or CVD has been paid on value of such software under MRP based valuation. This exemption atleast settles that in cases where Excise duty or CVD is paid on packaged software under MRP based valuation, then benefit of service tax exemption will be available to the Industry. However, even under MRP based assessment, valuation remains an issue, when packaged software is given with licensing rights or linked with royalty charges. Further, where sales are made to institutional / industrial consumers (wherein affixation of MRP may not be required) the issue of appropriate levy may still be open and lead to uncertainty for the industry.
Valuation issues continue to perplex the industry in scenarios where license to use software is granted / imported once and license fee is payable over a period of time or master software is imported and royalty is payable over period of time or in case of free / composite supplies. Further, electronic supply of software is treated as goods for VAT purposes but the same treatment is not accorded under Customs & Excise laws. Therefore, the Industry is hopeful that this Budget will lend clarity to the meaning of these terms and settle the discrepancies.
Grappling with multiplicity of indirect taxes, valuation issues, lack of certainty on characterization of software and ever increasing transfer pricing adjustments, the IT industry awaits the Union Budget 2011 to be unveiled to decipher how and to what extent some of the aforesaid issues will be resolved.
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