PRE-BUDGET MEMORANDUM 2015-16 - Direct Tax Issues December 2014
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PRE-BUDGET MEMORANDUM 2015-16
Direct Tax Issues
December 2014Pre-budget Memo for IT/ITeS Industry, 2015-16
Contents
EXECUTIVE SUMMARY .......................................................................................................................................4
SUMMARY- SOFTWARE PRODUCT TAXATION ISSUES AND SUPPORT FOR TECHNOLOGY
START-UPS.............................................................................................................................................................7
SOFTWARE PRODUCT TAXATION ISSUES ............................................................................................... 11
1. DUAL LEVIES ON SOFTWARE-VAT AND SERVICE TAX ...................................................................11
2. HIGH CUMULATIVE TAX OUTFLOW ......................................................................................................12
3. RECURRING BILLING IN INDIA EFFECTIVELY BARRED ..................................................................12
4. SUPPORT INNOVATIVE COMPANIES TO LEVERAGE DOMESTIC MARKETS.............................13
DIRECT TAXES ....................................................................................................................................................13
5. 10% TDS ON SOFTWARE PAYMENTS LEADING TO OPERATIONAL DIFFICULTIES FOR
SMALL COMPANIES ...........................................................................................................................................13
6. REVISE THRESHOLD LIMITS ..................................................................................................................14
Section 194J of the Income Tax Act, 1961 .....................................................................................14
Relief from the applicability of MAT provisions ...............................................................................14
7. CLARIFICATION ON REQUIREMENT TO DEDUCT TDS ON UPGRADE AND SUBSCRIPTIONS
15
INDIRECT TAXES ................................................................................................................................................15
8. REVISIT THRESHOLD FOR PAYMENT OF SERVICE TAX ................................................................15
9. INADEQUATE ABATEMENT FOR PACKAGED/CANNED SOFTWARE FOR PAYMENT OF
EXCISE DUTY ......................................................................................................................................................15
10. PROVISION PERTAINING TO MANDATORY PRE-DEPOSIT IN APPEAL ...................................16
11. SUGGESTIONS FOR SUPPORT TO TECHNOLOGY START-UPS...............................................16
SUMMARY - DIRECT TAXES.......................................................................................................................... 19
DIRECT TAX ISSUES....................................................................................................................................... 28
12. INCENTIVE FOR ADOPTION OF IT - TOWARDS MAKE IN INDIA .................................................28
Investment Allowance U/S 32 AC Excludes IT Products ..............................................................28
Software related expenditure for R&D not eligible for weighted deduction ................................29
Incentive for research and development .........................................................................................29
13. INCENTIVE FOR EXPENDITURE ON SKILL DEVELOPMENT (U/S 35CCD)...............................30
14. MINIMUM ALTERNATIVE TAX (MAT) .................................................................................................31
High MAT rate......................................................................................................................................31
MAT on Dividend Income from foreign companies only ................................................................31
Levy of Minimum Alternate Tax on SEZs ........................................................................................32
15. LIABILITIES DUE TO AMENDMENTS IN ROYALTY DEFINITION .................................................32
16. DISALLOWANCE OF EXPENSES INCURRED ON CSR ACTIVITIES ...........................................33
17. OFFER OPTION FOR CONSOLIDATED TAX RETURN FILING .....................................................34
18. ISSUES RELATED TO FOREIGN TAX CREDITS .............................................................................35
19. RE-NEGOTIATION OF DOUBLE TAXATION AVOIDANCE AGREEMENTS ................................36
20. SOCIAL SECURITY AGREEMENTS ...................................................................................................37
21. DIVIDEND DISTRIBUTION TAX (DDT) ...............................................................................................37
2|PagePre-budget Memo for IT/ITeS Industry, 2015-16
Cascading effect of DDT on dividend received from foreign companies ....................................37
Gross up of dividend And Income Distribution Tax ........................................................................38
Difficulties in claiming Tax Credit by foreign shareholders ...........................................................38
22. TAX NEUTRALITY W .R.T LEVY OF SECURITIES TRANSACTION TAX ON GDR/ADR
RECEIPTS .............................................................................................................................................................39
23. TAX RESIDENCY CERTIFICATE / FURNISHING OF PAN ..............................................................40
24. HIGH TAX RATE ON ROYALTY OR FEES FOR TECHNICAL SERVICES....................................40
25. SHARE PREMIUM IN EXCESS OF FAIR MARKET VALUE TREATED AS INCOME ..................41
26. TAXATION OF UNLISTED SHARES....................................................................................................42
27. ADDITIONAL INCOME TAX ON DISTRIBUTED INCOME FOR BUYBACK ON UNLISTED
SHARE ...................................................................................................................................................................42
28. CLARIFICATIONS REQUIRED ON THE INDIRECT TRANSFER RULE IN SECTION 9 .............44
29. TAXABILITY OF IMMOVABLE PROPERTY .......................................................................................45
No provision for cases of property for inadequate consideration .................................................45
Issues related to Individual and joint Properties .............................................................................45
30. CARRY BACKWARD OF BUSINESS LOSSES TO BE ALLOWED .................................................46
31. AMENDMENT TO THE DEFINITION OF THE TERM ‘SHORT-TERM CAPITAL ASSET’............46
32. INTEREST PAYABLE BY THE ASSESSEE UNDER SECTION 220 ...............................................47
33. PROSECUTION IN RELATION TO IT ASSESSMENTS ...................................................................47
34. INCOME COMPUTATION AND DISCLOSURE STANDARDS ........................................................47
35. DENIAL OF DEDUCTION UNDER SECTIONS 10A/10B/10AA .......................................................48
Denial of Benefits on Delayed Realization of Export Sale Proceeds ..........................................48
Denial to newly formed undertakings formed under same license u/s 10AA / 10A/ 10B .........49
Clarification on circular 1 / 2013 based on Rangachary Committee Recommendation ...........49
Inconsistency in the definition of “export turnover”/ “total turnover” ............................................50
36. SET-OFF OF LOSSES, UNABSORBED DEPRECIATION U/S 10A/10B/10AA..............................51
37. SET OFF OF UNABSORBED DEPRECIATION, ACCUMULATED LOSS IN MERGER .............52
38. DENIAL OF 10B BENEFITS TO STPI UNITS DUE TO PROCEDURAL LAPSE ............................53
39. CONTRIBUTIONS TO SUPERANNUATION FUND ..........................................................................54
40. RELAXATION ON FILING TAX RETURN BY FOREIGN COMPANIES HAVING ONLY FTS/
ROYALTY INCOME .............................................................................................................................................54
ANNEXURE I: .................................................................................................................................................... 55
3|PagePre-budget Memo for IT/ITeS Industry, 2015-16 EXECUTIVE SUMMARY Services in India, and more specifically the IT industry, makes a prominent contribution to national and states' incomes, trade & FDI inflows and employment. However, it has shown subdued performance in the last three years. The economic survey proposed revival through reforms and speeding up of the policy decision making and a targeted approach with focus on big ticket services, to retain and further India’s lead. India is globally renowned for its strength in IT and is poised to scale to even greater heights. The recent emergence of a rapidly growing ecosystem for innovation; driven by young, tech savvy entrepreneurs is a powerful new complement to the existing global reach of the industry. There is no doubt that the Government and Industry need to work in tandem with each other to drive large scale IT-enabled transformation and development. The vision of Digital India will largely rely on the strengths of the IT industry to achieve many of the critical national development goals. The Industry is keen to participate and innovate to offer targeted solutions and products for India. Digital India and Make in India offer tremendous challenges and opportunities for the innovation driven technology Industry. However, there are several concerns constraining the business environment today. It is well known that technology start-ups in India constitute a majority of the IT industry, and are not only innovating but also helping larger companies innovate. They are at the forefront of building global success stories and contributing to Indian exports, employment and perception. With over 15,000 technology Start-ups and IT SMEs today, it is the second largest hub globally, after China. Many countries are actively wooing technology driven start-ups and offer a more business friendly environment in addition to bringing them closer to the market. The Government therefore should evaluate and design, support and incentive schemes demonstrated to be effective around the world for implementation in India. Targeted interventions are suggested to address constraints related to availability of funding, taxation and compliance burden. There is a dual levy of Service tax and VAT on pre-packaged software that needs to be addressed urgently. The high rate of TDS (10%) for small companies, who would apply for refunds, further constrains the availability of working capital. Revision of thresholds for exemption and increase in abatement for packaged software are also suggested. Changes related to R&D credits, reimbursements of manpower training cost etc. are suggested. In the absence of funding from Financial Institutions, technology start-ups rely on angel investors for initial support for both funds and guidance. Difficulties are further compounded in for software product companies where revenue streams are not upfront. The ‘angel tax’ introduced in the form of taxing share premium in excess of fair market value for share transfer is impacting investors. While the intent of not levying this tax on angel investors has been clarified by the Government, there has been no effort to remove the tax legislatively. Globally emergent business models like SaaS have a subscription model requiring recurring billing. The 2FA mandate of the RBI is seriously compromising competitiveness of Indian companies in offering / adopting such services. It is urgent that a suitable exemption linked to e.g. transaction value or time limit from the date of first authorization be considered and allow for one-time authorization that can be re-applied for subsequent billing periods. 4|Page
Pre-budget Memo for IT/ITeS Industry, 2015-16 The Government of India’s vision of a Digital India is indeed an opportunity to leverage domestic markets. Based on IT industry’s past experience in participating in Government projects, difficulties such as long pending payments and others, a special effort is need to address these concerns. In addition there are conditions that specifically discourage participation of small innovative companies. These need to be removed for such entities to participate in the India growth journey. The Government has an important role to essay in supporting the innovation driven sector and its start-ups and SMEs. In recognition of the transformative impact of IT, there is a need to extend incentives to Indian Industry for adoption and implementation of IT tools and global processes, for efficiency enhancement and global competitiveness. This is all the more critical in the context of ‘Make in India’. We therefore suggest that investment allowance be extended to include expenses made towards computers and software. Similarly, R&D expenses should recognize the extensive use of simulation and modelling tools and deductions would be made available for such expenditure. The IT sector has Indian companies which are now global MNCs. This is a significant change from the past where India was a primary importer of technology & goods. This therefore warrants an analysis of the current policy provisions to support global operations and simplify compliance. We propose that a comprehensive approach to Foreign Tax Credit and comprehensive filing provisions be adopted. In addition we suggest a Duty drawback scheme for service export in line with provisions available for goods be designed to simplify processes and eliminate refunds. The Place of Provision of Service Rules require clarifications. The issues enclosed have been of concern since inception, and simple clarifications would remove scope for misinterpretation, and offer greater certainty to companies and tax assessment processes. Specifically, issues related to taxation of transactions between head office and branch office, taxation on export of testing services and BPO/KPO (if treated as intermediary) require clarifications. There are various issues related to filing of taxes, verification, form generation etc. that impose administrative and procedural burden. We have suggested some procedural changes and simplification; most of which have been discussed with the TARC as well, for your consideration. The IT sector is characterized by fast changing technologies leading to new business models, service delivery methods and platforms. These have far reaching implications not only on business operations, but also the policy and resulting business environment. It is therefore critical that India keeps pace with the dynamic nature of the technology, businesses and governance. We urge the Government to consider adopting collaborative approach with the Industry as policies and rules need to be tweaked and modified, framed anew and revisited for its relevance. Exports from IT sector continue to fill the large gap in India’s external trade balance. There is a need to address operational difficulties in SEZ, and expedite the SEZ revival plans, including removal of MAT on SEZ income. 5|Page
Pre-budget Memo for IT/ITeS Industry, 2015-16 Promotion of Tier II/III cities would be key to inclusive growth, and the sector can largely benefit from this movement with support of the Government in terms of infrastructure and easing of business process compliances, including fast track approvals e.g. since there is relatively low environmental impact of IT industry, expediting local environmental clearances. E-commerce is now a growing Industry, with several Indian entrepreneur led organisations having emerged as leaders. Business models are evolving and there is need to understand online marketplaces which is a platform for Merchants/ Manufacturers to sell their products w.r.t tax implication. We recommend that taxation on digital transactions should not just be at par with the physical world, but should in fact encourage adoption and migration to technology enabled platforms. This will help Government leverage the inherent transparency and traceability of online transactions and also help both manufacturers and consumers to take advantage of the efficiencies of ecommerce. We recommend that as a first step field officers should be updated and should understand the new evolving business models. As Digital India is now in its implementation phase, the government should be proactive in its role as a facilitator for migration towards a leading Digital Economy. We recommend that Industry and Government should collaborate on Policy and Governance issues to make this happen. We request the Government to consider the NASSCOM recommendations as positioned in the Pre-Budget Memorandum 2015-16. 6|Page
Pre-budget Memo for IT/ITeS Industry, 2015-16
SUMMARY- SOFTWARE PRODUCT TAXATION ISSUES AND SUPPORT FOR TECHNOLOGY START-UPs
S.no Issue an Recommendations Justification
SOFTWARE PRODUCT TAXATION ISSUES
Dual levies on software-VAT and service
tax
For all Internet downloads (license, product
Software companies, primarily SMEs face an uncertain and unfair tax environment that
key, upgrades etc.), and other forms of
is blocking capital.
services like maintenance contracts, there is a
dual levy of both VAT and Service Tax.
As software products from India emerge, and companies develop a business model
1. where services are also bundled with the product, this issue of duality will impair
Recommend clarification such that VAT and
competitiveness. Many software SMEs, for lack of clarity are advised to pay both VAT
Service tax dual burden is removed. For
and Service Tax to avoid penalties.
software transactions which involve both a
product and associated services, the services
VAT is also levied on the Service tax component.
component should be subject to service tax
alone, and the product value should be subject
to VAT only.
High cumulative cash outflow
The current tax implications (10%TDS, 12.36%
service tax and VAT) results into a huge cash
outflow for small companies and cumulatively Unnecessary cash outflow leading to operational difficulties and cash crunch
2. impacts the working capital position. 10% TDS for Small Companies and Start-ups results in refund
Recommend the government to consider
mitigating tax by adopting a comprehensive
approach on total tax output
Recurring billing in India effectively barred
Recurring billing is effectively barred with effect It is critical for SaaS companies that they are able to conduct Card Not Present
from August 20091 when the RBI mandated transactions as a one-time occurrence at the time of service sign up by their customers
3.
additional authentication based on information and re-authorize and apply card token information on a repeated basis subject to
not visible on the cards for on-line Card Not suitable safeguards that the RBI may prescribe.
Present transactions, and extended to IVR
1
RBI/2008-2009/387 dated 18.02.2009, Reserve Bank of India
7|PagePre-budget Memo for IT/ITeS Industry, 2015-16
transactions2, in the interest of security and
prevention of fraud.
Recommend providing for consumer consent
for recurring billing to be expressly stated in an
online signup form and clarify that one-time
passwords and other tokens can be stored and
re-applied for subsequent billing periods so
long as they are within the capped limit of
transaction value or time duration e.g. an 18
month period would be a reasonable limit for
monthly billing arrangements.
Support Innovative Companies To
Leverage Domestic Markets
Digital India and Make in India present unique
opportunity in the domestic market for software
products and services. However there are
hurdles that discourage participation of SMEs
Need for simplification of the procurement processes, and revisit bidder eligibility
4. in Government procurement.
criteria on what would qualify as past track record and experience is important.
Recommend that Industry and Government
should work together to streamline the
procurement process to enable participation of
innovation driven small companies and
technology start-ups.
DIRECT TAXES
10% TDS on Software Payments leading to Profitability of SMEs and software product companies are lower. Further, product
operational difficulties for small companies development requires investment and time before they are launched. A 10% TDS on
every transaction is high for such companies.
SMEs and start-up software companies
5.
suffering TDS @ 10%. Actual tax liability on Financing difficulties for SMEs and start-up companies due to low asset base and non-
profits is far lower than the TDS liability. consideration of technology as an asset to offset risk further compounds the issue of
Recommend Lower TDS rates for software blocked capital.
SMEs and start-up companies.
2
RBI/2009-2010/420 dated 23.04.2010, Reserve Bank of India
8|PagePre-budget Memo for IT/ITeS Industry, 2015-16
Consider adjusting pending refunds to future
TDS liability.
Banks to consider offering loans to companies
based on pending TDS refunds, as if it is a
book debt.
6. Revise threshold limits
Section 194J of the Income Tax Act, 1961
TDS @ 10% on payments made for acquisition
of software for amount greater than ₹ 30,000 in
Threshold limit is low and does not reflect current business environment in terms of
6.1. a financial year.
pricing trends of commercial software
Recommend Threshold limit be increased to ₹
3.00 lakh in a financial year.
Relief from applicability of MAT
No threshold limit and all companies,
notwithstanding the size, are subject to the
provisions of MAT.
Recommend a threshold limit for SMEs be Burden on the SMEs who rely on plough back of profits for reinvestment in the initial
6.2. introduced. Companies with a turnover less years of inception given the lack of credible sources of external funding.
than
Rs 50 crores should not be subject to MAT.
Alternatively, an initial waiver for payment of
MAT be provided to companies for a term of 5-
7 years.
Clarification on requirement to deduct TDS
on upgrade and subscriptions
Payment for Software Ancillary Services such
as AMC’s, Upgrade Fees, Subscriptions, etc.
is “Royalty” u/s 194J r/w 9(1)(iv) Explanation 2 They do not involve transfer of rights, or grant of license but involve only payments of
7.
consideration for services
Recommend Clarify for Payments towards
services like AMC’s, Upgrade Fees,
Subscriptions, etc. there is no “Royalty”, hence
no TDS.
INDIRECT TAXES
Revisit threshold for payment of service tax These are principally two variations of the indirect taxation, strong disparity with regard
8.
to the levy of tax.
9|PagePre-budget Memo for IT/ITeS Industry, 2015-16
The present threshold for payment of Service
Tax by companies is ₹ 1 million while for
excise duty is ₹ 40 million.
Recommend Service tax threshold be aligned
to threshold for Excise.
Inadequate abatement for packaged /
canned software for payment of excise duty
Abatement of 15% is allowed from RSP to
arrive at the value of Packaged Software. The
This notified abatement of 15% does not take into account the incidence of taxes on
9. taxes on the product amount to 22% of the
the product - VAT/CST rates - 5.5% to 6.6%; excise duty 10% and Education Cess
RSP and the notified abatement of 15% is not
adequate
Recommend abatement be increased to 30%.
Provision pertaining to mandatory pre-
deposit in appeal
10. Cash flow crunch and operational difficulties
Recommend reducing the cap of ₹ 10 crores
to ₹ 30 lakhs for SMEs.
11. SUGGESTION FOR SUPPORT TO TECHNOLOGY START-UPS
Recommend Tax incentives, R&D credits,
encourage development and protection of IP,
tax deductibility benefits on manpower hiring Promote innovation, employment generation with an eye for success under the “Make
and training cost , encourage development of in India” label
Tier II/ Tier III cities, introduction of tax
exemption vouchers
10 | P a g ePre-budget Memo for IT/ITeS Industry, 2015-16
SOFTWARE PRODUCT TAXATION ISSUES
1. DUAL LEVIES ON SOFTWARE-VAT AND SERVICE TAX
Software can either be a customized software (developed as per the specific requirements) or a
packaged software a.k.a “off-the-shelf” software available to be used by a number of users.
• The definition of the term “service” as per section 65B (44) is wide enough to cover any
activity and excludes sale of goods and other deemed sale transactions as per Article
366(29A) of the Constitution, for example transfer of right to use goods. Hence, all
transactions which are treated as “sale” shall be outside the ambit of service tax.
• Historically, while packaged software has been treated as “goods”, customized software
has been treated as “services”. Accordingly, packaged software has been subjected to
Sales Tax, VAT, Customs Duty and Excise Duty (depending upon the exact nature of
the transaction), customized software has been subjected to Service Tax.
• In cases when software / licenses are supplied electronically, VAT and Service Tax are
levied but there is no levy of Customs Duty or Excise Duty since the same does not
qualify as “goods” for the purposes of Customs / Excise laws.
Issue
• Over the years there have been conflicting views on the applicability of VAT and/or
Service tax on the software transactions particularly sale of software either electronically
or through media. This has resulted in dual levies of VAT and Service Tax and has
impacted the overall viability of business.
• Often, the customers / clients (including Government departments) deny the payment of
dual taxes and insist on payment of either VAT or Service Tax. This results into an
additional cost for the companies since the tax component cannot be passed on to end
customer.
• As software products from India emerge, and companies develop a business model
where services are also bundled with the product, this issue of duality will impair
competitiveness. Many software SMEs, for lack of clarity are advised to pay both VAT
and Service Tax to avoid penalties
• SMEs do not have the luxury of large teams and dedicated personnel. A key technology
person is often required to spend substantial time with tax authorities. This increases the
overall cost and burden for companies. SMEs are not in a position to litigate given the
resource constraints, long time taken to settle such disputes and the fact that they would
rather concentrate on their core product and business development
Recommendation
It is recommended that CBEC clarify the following:
We await the introduction and implementation of GST as it is expected to resolve the
issue of duality.
11 | P a g ePre-budget Memo for IT/ITeS Industry, 2015-16
Provision of standard software, including license to use such software, whether
electronically or on physical media, should not be subject to dual levies, and in case
VAT is applied, it would not be liable to Service tax.
Given the stand taken by the Central Government on the treatment of software
supplied electronically, it may be clarified that service tax is applicable on the sale of
software which is downloaded electronically and Central Sales Tax is not applicable
on the same in case of interstate transaction.
For software transactions which involve both a product and associated services, the
services component should be subject to service tax alone, and the product value
should be subject to VAT only.
As an immediate step, Government departments should be issued a clarification that
imposition of service tax and VAT on the same product is as per the IT Act and
payment of any should be not reduced on the pretext that product cannot be a
service. This would provide interim relief to companies.
2. HIGH CUMULATIVE TAX OUTFLOW
The current tax implications (10%TDS, 12.36% service tax and VAT) results into a huge cash
outflow for small software product & services companies and cumulatively impacts their working
capital position.
The 10% TDS deduction on software products is leading to a net reduction of cash inflow from
sales (88.74 paise for every ₹ 1 of sales) after paying Service Tax. Software Product companies
have long gestation periods of no profits and negative cash-flows. This unnecessary cash
outflow adds to difficulties and cash crunch. Further, a 10% TDS deduction for small companies
and start-ups usually require refunds. (Details provided in point 5 below)
We recommend the government to consider mitigating tax implications for SMEs by taking into
account a comprehensive approach on total tax outflow and its impact.
3. RECURRING BILLING IN INDIA EFFECTIVELY BARRED
Recurring billing is effectively barred with effect from August 20093 when the RBI mandated
additional authentication based on information not visible on the cards for on-line Card Not
Present transactions, and extended to IVR transactions4, in the interest of security and
prevention of fraud. Therefore, to charge a subscription amount to customer’s card, a manual
authorization by customer is required. The following additional steps are required
After a customer has signed up for a service, service providers cannot authorize
additional charges on a recurring basis for each billing period
User is required to authorize payments through an OTP or 3D secure password, every
time a payment has to be made, by personally logging in.
This model may work for utility payments, but compromises viability of SaaS services.
Customers require frequent payment reminders, which causes friction
3
RBI/2008-2009/387 dated 18.02.2009, Reserve Bank of India
4
RBI/2009-2010/420 dated 23.04.2010, Reserve Bank of India
12 | P a g ePre-budget Memo for IT/ITeS Industry, 2015-16
Recommendation
It is critical for SaaS companies that they are able to conduct Card Not Present transactions as
a one-time occurrence at the time of service sign up by their customers and re-authorize and
apply card token information on a repeated basis subject to suitable safeguards that the RBI
may prescribe. We therefore recommend the following:
Provide for consumer consent for recurring billing to be expressly stated in an online
signup form,
Clarify that one-time passwords and other tokens can be stored and re-applied for
subsequent billing periods so long as they are within the capped limit of transaction
value or time duration e.g. an 18 month period would be a reasonable limit for monthly
billing arrangements.
4. SUPPORT INNOVATIVE COMPANIES TO LEVERAGE DOMESTIC MARKETS
Digital India and Make in India present unique opportunity in the domestic market for software
products and services. However there are hurdles that discourage participation of SMEs in
Government procurement. There is a need to simplify procurement processes, and revisit bidder
eligibility criteria on what would qualify as past track record and experience is important.
Recommendation
We recommend that Industry and Government work together to streamline the procurement
process to enable participation of innovation driven small companies and technology start-ups.
DIRECT TAXES
5. 10% TDS ON SOFTWARE PAYMENTS LEADING TO OPERATIONAL DIFFICULTIES
FOR SMALL COMPANIES
Issue
SMEs and start-up software companies are suffering from TDS @ 10% due to
retrospective amendments in the definition of Royalty by Finance Act 2012. (for details
refer to point 15 in the Direct Tax section) These companies work on low margins and
thus the TDS implication leads to cash constrains making distribution / selling of
software an unviable business. These companies face an uncertain tax environment that
is blocking their working capital and leading to serious operational difficulties.
Promoters have to augment capital since SMEs and start-up companies face hurdles in
getting loans even in the SME category because their asset base is low and technology
is not considered as an asset that can offset risk.
While there are provisions to seek low rate of TDS on a transaction basis, however, this
exemption does not work for the Software industry as the exemption is granted on a
customer name basis and companies cannot provide this list in advance, a condition
more pronounced for software products.
The Government decision to notify 10% TDS for software transaction maybe in line with
the profit margins of the large and well established service providers of the IT sector.
13 | P a g ePre-budget Memo for IT/ITeS Industry, 2015-16
However, there is a need to recognize the niche technology driven small enterprises,
and acknowledge that the margins and cost structures of such companies are different.
Recommendation
Government has notified lower TDS rates for certain payments like payment transfer of
immovable property (1%), rent of plant and machinery and other equipment (2%), contractual
payments (2%). TDS rate for software companies should also be reduced to 1-2%.
6. REVISE THRESHOLD LIMITS
The IT Act in recognition of the compulsions and limitations of the SME and start-ups have
notified several thresholds below which provisions are not applicable.
We request that a periodic review mechanism be institutionalized, which will ensure that the
thresholds are revisited at predefined frequencies and suitably changed to make it relevant with
time.
Thresholds which needs consideration are as follows:
Section 194J of the Income Tax Act, 1961
In terms of Section 194 J of the Act, TDS @ 10% is required to be deducted on payments made
for acquisition of software when the amount exceeds ₹ 30,000 in a financial year.
Recommendation
The threshold limit for certain payments have been kept much higher than the threshold for
payment for software. The following table provides a summary5:
Section Payment Nature Threshold limit TDS
Rate
194C Contractors (including Advertising & Sub- 30,000 (per payment) or 2%
Contractor) 75,000 p.a.
194I Rent of Plant & Machinery and Other 180,000 2%
Equipment
194IA Transfer of Immovable Property other than 5,000,000 1%
Agriculture Land
We recommend that threshold limit for payment of software be increased to ₹ 3.00 lakh in a
financial year.
Relief from the applicability of MAT provisions
Currently, the MAT provisions have no threshold limit and all companies, notwithstanding their
size, are subject to the provisions of MAT. This is a burden on the SMEs who would usually have
to rely on plough back of profits for reinvestment in the initial years of inception given the lack of
credible source of external funding.
5
FY 2014-15
14 | P a g ePre-budget Memo for IT/ITeS Industry, 2015-16 Added tax costs in the form of MAT not only allows for lesser amounts for reinvestment but also puts cash flow pressure on supporting tax payments through bank and other external funding which is not desirable. Recommendation A threshold limit for SMEs be introduced. Companies with a turnover less than ₹ 50 crores should not be subject to MAT. Alternatively, an initial waiver for payment of MAT be provided to companies for a term of 5-7 years. 7. CLARIFICATION ON REQUIREMENT TO DEDUCT TDS ON UPGRADE AND SUBSCRIPTIONS Software Ancillary Services such as AMC’s, Upgrade Fees, Subscriptions, etc. which do not involve transfer of rights, or grant of license but involve only payments of consideration for services is “Royalty” for the purposes of Section 194J r/w 9(1)(iv) Explanation 2 of the Income Tax Act, 1961. Recommendation Clarification may be issued that AMC’s, Upgrade Fees, Subscriptions, etc. which do not involve transfer of rights, or grant of license, but involve only payments of consideration for services is not “Royalty” for the purposes of Section 194J r/w 9(1)(iv) Explanation 2 of the Income Tax Act, 1961 and that such transaction are not liable for TDS u/s 194 J of the Income Tax Act, 1961. INDIRECT TAXES 8. REVISIT THRESHOLD FOR PAYMENT OF SERVICE TAX Issue The present threshold for payment of Service Tax by companies is ₹ 1 million while for excise duty is ₹ 40 million. These are principally two variations of the indirect taxation (one for goods and the other for services). There is a strong disparity with regard to the threshold for levy of tax. Recommendation Service tax threshold be aligned to threshold for Excise i.e. ₹ 40 million. 9. INADEQUATE ABATEMENT FOR PACKAGED/CANNED SOFTWARE FOR PAYMENT OF EXCISE DUTY Issue Abatement of 15% is allowed from RSP to arrive at the value of Packaged Software or Canned Software, falling under CETH 8523 of CETA 1985 for payment of excise duty. This was notified in 2008. (Serial No 93A of Notification No 49/2008-CE (NT) dated 24.12.2008, for valuation under Section 4A of the CEA, 1944) This notified abatement of 15% does not take into account the incidence of taxes on the product - VAT/CST rates ranging from 5.5% to 6.6%; Octroi/Entry Tax of 5.5% in State of Maharashtra; excise duty from 10% ad valorem and Education Cess. 15 | P a g e
Pre-budget Memo for IT/ITeS Industry, 2015-16
The taxes on the product amount to ~22% of the RSP and the notified abatement of 15% is not
adequate
Recommendation
The abatement of 15% allowed under the said notification be increased to 30%.
Packaged/Canned software products are sold through a multilayer dealer/distribution chain
through which they are delivered to the ultimate consumer high trade discounts on MRP are
offered.
10. PROVISION PERTAINING TO MANDATORY PRE-DEPOSIT IN APPEAL
The provisions of Central Excise Act (applicable to Service tax as well) are amended by
introducing a mandatory pre-deposit. In case of a small or medium scale entity whose tax/ duty
demand is less than ₹ 50 lakhs, 17.5% (7.5% - 10%) of the total tax/ duty demanded needs to
be pre-deposit before an appeal before the CESTAT. Further, the cap of ₹ 10 crores on the
amount of pre-deposit required under this section would not be beneficial to SMEs since their
value of tax/ duty demand is not very high.
Amongst recommendations with regard to the amendment (separately detailed in point 17 in
indirect taxes section), we recommend that specifically for SMEs, the maximum amount of pre-
deposit of ₹ 10 crores should be reduced to Rs 30 lakhs in the case of companies filing appeals
before Commissioner (Appeals) and then CESTAT, so that the SME companies also can enjoy a
maximum cap, as the existing cap of ₹ 10 crores can never be availed by such companies.
11. SUGGESTIONS FOR SUPPORT TO TECHNOLOGY START-UPS
1. Introduction of tax exemption 'vouchers'
There are no start-ups /SME related tax exemptions currently in the Act. The exemption
which in the form of tax holiday to SEZ units/section 35AD sectors does not trickle down
to start ups. Various commercial and regulatory factors like viability of SEZs to start up
business, requirements of investment, net foreign exchange gains etc. does not ensure
that SEZ infrastructure is made available to start ups.
Therefore in order to provide the much needed fillip and thrust to the start-up sector, it is
recommended that a concept of tax exemption vouchers be extended. As a concept, the
tax exemption vouchers would be provided to start-up units falling within certain
parameters. Such units which satisfy the particular conditions would be provided with an
exemption in the form of a fixed rebate on the tax to be paid for an initial period of 5-7
years or a refund of certain percentage of tax paid for the period
2. Deduction for employment of new workmen is available under section 80JJAA of the
Income Tax Act, 1961 for labour intensive companies is not available to IT. Also
minimum employment of 100 new employees too high for start-up. There is a need for
hiring qualified and educated people for product development and a similar scheme
acknowledging the need for the technology start-up should be designed. Our
suggestions are as follows
16 | P a g ePre-budget Memo for IT/ITeS Industry, 2015-16
Manpower training cost: As tech start-ups embrace new and evolving
technologies, there is a need to train manpower as they develop products and
services. Partial refund of training cost undertaken maybe considered as an
incentive. This could be aligned to the Flexible Training Opportunities Program in
the UK, where funding is available for up to 10 employees per business and
refund is up to 50% of each employee training session.
Reimburse expenses
1. Towards hiring and retention R&D team, and associated R&D expenses.
Limits could be set for 5 member R&D team and not more than 2 in the
expert / advisor category. Singapore (RISC) offers 50% support for
manpower related costs, 30% for professional services, 30% for
equipment, consumables and software costs and 30% for IPR. This is in
addition to R&D tax credits.
2. Towards hiring technical experts and advisors from India and abroad
(similar to Margdarshi fellowship of DBT and Welcome Trust).
3. R&D Credits: R&D incentives like weighted deduction of expenses including manpower
salary should be made available. Since many of these firms rely on quality people,
capital investments maybe low. Therefore, traditional definitions and parameters as
applicable need to be modified to allow companies with low capital investments to
access R&D credits related to operations expenses. Models like RISC from Singapore
maybe studied.
4. Tax incentives
One of China’s core innovation tax policies, the High and New Technology
Enterprise (HNTE) program, offers qualified company locations a 15 percent tax
rate (versus the standard 25 percent tax rate). The HNTE status is granted by
provincial tax authorities for company facilities located within those provinces.
Qualified software enterprises and integrated circuit manufacturing enterprises
are eligible for tax exemption in the first two years and tax reduction by half in the
next three years, starting from the first profit-making year. Similar incentive
program may be developed for High technology Enterprise in India, keeping in
mind that R&D outcome in the form of software products and services would be
intangible, and should be recognised for the purpose of direct tax benefits.
To encourage companies to develop and protect IP, the Patent Box model being
practised in UK and other European nations may be emulated in India. Currently
in UK, a reduced 10% rate of corporate income tax is applicable on profits from
patents. This incentive structure will further focus IP led product and service
development.
5. Incentive to move to Tier II /Tier III cities would tie in with the overall digitisation of the
Indian economy and encourage development of smart city zones across the country.
Percentage of refunds / reimbursements as suggested above to be enhanced
for Tier II/III locations. E.g. 80% refund of manpower training cost as against
17 | P a g ePre-budget Memo for IT/ITeS Industry, 2015-16
50% for companies in Tier I locations; 70% support for manpower related costs,
50% for professional services, 50% for equipment, consumables and software
costs and 65% for IPR.
Encourage companies to participate in events both national and global by
reimbursing cost of travel and participation including registration fees etc. This
will help companies network and build brands. This could be provided for under
the 10K crore funding, for MSMEs.
18 | P a g ePre-budget Memo for IT/ITeS Industry, 2015-16
S.no. Issue and Recommendations Justification
SUMMARY - DIRECT TAXES
DIRECT TAX
12. Incentive for adoption of IT - towards “MAKE IN INDIA”
Investment allowance u/s 32AC excludes IT products
“New asset” eligible for tax benefit excludes computers or computer Computers and computer software enhance efficiencies
software. and have a critical role in modern day manufacturing in
12.1.
process monitoring, application engineering, quality
Recommend computers and computer software be regarded as “new checks etc.
asset” for the purposes of Section 32AC.
Software related expenditure for R&D not eligible for weighted
deduction
Software simulations are indispensable tools for R&D
12.2. The revised guidelines (May 2014) by DSIR specifically exclude the
today and help in optimal use of resources.
expenditure on software as R&D cost.
Recommend expenditure related to computer software directly used for
R&D activities be classified as eligible expenditure u/s 35 (2AB).
Incentive for research and development
This benefit is specifically important in the case of start-
Recommend that Section 35(2)(AB) be amended to include ‘Information
12.3. ups and SMEs’
technology” along with biotechnology so that there is clarity that the
Many countries provide R&D benefits on such activities
weighted deduction would be available to an assessee engaged in
production of computer software and business of information technology
so that all R&D activities are enabled for weighted deduction.
Incentive for expenditure on skill development expenses (u/s 35CCD) The industry operates in a highly competitive
environment requiring constant upgrade of skills and
13.
Recommend weighted deduction of 1.5 times of expenses incurred on new technologies and incurs substantial costs on skill
trainings, including in-house training for development of technology skills development.
19 | P a g ePre-budget Memo for IT/ITeS Industry, 2015-16
14. Minimum Alternative Tax
High MAT rate
MAT rate of 20% is too high in relation to the normal tax
MAT rate has been rising steeply over the years
14.1. rate at 30%.; There are difficulties claiming MAT credit
in case of amalgamation.
Recommend that MAT rate to be reduced to 10%.
MAT on Dividend Income from foreign companies only
Dividend received from foreign companies taxed u/s 115JB
14.2. Dividend received from domestic companies are
Recommend removal MAT on such dividend income or levying exempt from paying the tax.
concessional MAT tax rate in line with the normal tax rate.
Levy of Minimum Alternate Tax on SEZs
With effect from April 1, 2012, the MAT exemption on SEZ is withdrawn
14.3. The levy of MAT on SEZ income has impacted business
prospectively.
plans and in some cases, discouraged new SEZ units/
Recommend Income from SEZ not be subject to MAT. SEZ’s.
a. Difficulty for payers to pass on the tax incidence to
Liabilities due to amendments in royalty definition
foreign supplier
b. Ancillary services like maintenance or upgrades
Retrospective implications
fees liable to TDS
Definition widened retrospectively. All ancillary services provided on top
c. Explanation 2 & 5 conflict-imposing tax on Royalty
of the license under the definition of ‘royalty’
even when there is no transfer of right to use, while
Recommended On-line sales of ancillary services like maintenance
15. explanation 2 regards only 3 circumstances in the
should not attract TDS.
context of intangible property to be regarded as
Royalty
Inclusions resulting into interpretation issues
d. Basic services such as telephone / mobile charges
Payment made for basic services like purchasing ticket and basic
and broadband / data communication link / internet
telephone service may be treated as Royalty,
connectivity charges be outside the ambit of
Recommended to delete Explanation 4, 5 and 6.
Royalty
Disallowance of expenses incurred on CSR Activities
CSR expenditure is not considered as being incurred wholly and
exclusively for the purpose of carrying on business as per provisions of
section 37 and accordingly, not allowable as a deduction in computing the
16. taxable income.
Tax deductibility of expenses on CSR will encourage
voluntary CSR expenditure by the companies.
Recommended that expenditure on CSR be allowed as business
expenditure since CSR expenditure was held to be allowable by Tribunals
and Courts in the past.
20 | P a g ePre-budget Memo for IT/ITeS Industry, 2015-16
Offer option for Consolidated Tax Return Filing
Recommendations
Provide an option for filing a “consolidated tax return” to any company
incorporated in India with an effective shareholding in excess of 75%
(direct and indirect subsidiaries in India and overseas)
17.
Serves to facilitate ease of compliance, anti-avoidance,
A more beneficial provision would be to allow consolidation by the parent
transfer pricing, residency test and revenue neutrality
company incorporated in India of only those direct or indirect subsidiaries
(with an effective holding of 75% or more), which the Indian parent
company elects to disregard as a separate legal entity.
Issues related to Foreign Tax Credits
No aggregation /pooling of the credit allowed
DTAA relief denied by tax authorities in India on the local taxes. The FTC
restricted to tax liability in India resulting into partial grant of FTC.
Conflicts of either Residence or Source or Residence and Source causes
18.
of international juridical double taxation. Indian IT industry are now global and have extensive
operations abroad.
Recommended Policy changes be considered. Assesses be allowed to There is need to re-examine the current FTC provision.
carry forward the “unutilised” foreign tax credit for 5 years. Sourcing rules
be adopted in line with international principles.
Re-negotiation of Double Taxation Avoidance Agreements (DTAA’s)
The DTAAs, being bi-lateral in nature, would have the same force when
overseas clients pay for the IT / ITES services received by them from
exporters in India.
Taxation of offshore services provided from India, either as a direct levy or
19. as a withholding in foreign countries, would have a base erosion effect.
There is a deemed accrual of income in India,
Further, cost competitiveness of India’s export of technical services will
characterized under the DTAAs as fees for technical
decline significantly.
services, which requires withholding of tax.
Recommended The DTAAs, especially the developed countries, be re-
negotiated so that only services which are physically performed in a
contracting state are liable to tax in that State.
Social Security Agreements India has a very small network of SSAs. Need to expand
Widen the network of SSAs’ to include UK and USA. Notify the dates of given the export oriented, global reach of the industry.
entry into force of 5 agreements already concluded.
20.
Ensure implementation in “good faith” through Protocol. Since employment is organized to meet local
compliances;
21 | P a g ePre-budget Memo for IT/ITeS Industry, 2015-16
Automate the issuance of the CoC and increase time period for presentation Certificate of Coverage (“CoC”) issued by the competent
of the same. authority (“EPFO”) is required upfront with no time
relaxation; EPFO has not automated the issuance of
CoC.
21. DIVIDEND DISTRIBUTION TAX
Cascading effect in DDT on dividend received from foreign
This would help in aligning with the 26% or more equity
companies
shareholding provided in Section 115BBD and in
21.1. Recommend Section 115O be changed such that the DDT base should removing the cascading effect of DDT in cases where
be reduced by dividend received from specified foreign company i.e. the Indian company holds 26 percent to 50 percent
where the Indian company has 26% or more equity shareholding instead equity shares in the foreign company.
of dividend received from foreign subsidiary.
Gross up of Dividend and Income Distribution Tax
Levy of DDT on the grossed up amount resulting into an increase from Companies will opt to reduce the dividend declaration to
21.2. 16.99% to 20.5%. offset the increased tax cost and will also reduce
investible surplus of companies for growth plans
Recommend to roll DDT to 16.99%
Difficulties in claiming Tax Credit of Dividend Distribution Tax
Lack of clarity on the nature of DDT results in varying practices being
Will ensure continued flow of shareholder funds from
21.3. followed by countries.
abroad.
Recommend to clarify that DDT is a tax on the profits of the company.
Tax neutrality w.r.t. levy of Securities Transaction Tax on GDR/ADR
receipts
Tendering of shares under sponsored ADR / GDR attracts a capital gains
tax of 10% unlike the sale of shares (held for more than one year) on
22. recognized stock exchanges in India where securities transaction tax is Liberalization of the ADR / GDR regime is important to
levied and collected. allow issuance of depository receipts on all permissible
Recommend tax treatment of transfer of underlying listed shares through securities and encourage forex inflows.
a public tendering process to a foreign depository for issue of DRs be
aligned with that of sale of shares on a stock exchange.
Tax residency certificate / furnishing of PAN In the absence of any protocol for issuance of TRC under
A non-resident receiving consideration, with no tax liability in India, is also the DTAA, entitlements are being denied. Non-resident
23.
required to apply for a PAN. The enhanced scope of “royalty “not payees mitigate this consequence by shifting the tax
consistent with international norms. incidence to the payers in India under “net of tax”
22 | P a g ePre-budget Memo for IT/ITeS Industry, 2015-16
arrangements thereby increasing the burden on resident
Recommend the Government should enter into a protocol under all Double
tax payers.
Taxation Avoidance Agreements (DTAA) for obtaining TRC and furnishing
PAN and Section 90(4) and section 206 AA be made applicable to only such
countries.
High tax rate on royalty or fees for technical services
Tax on Royalty / FTS increased to 25% (from 10%). The enhanced rate of tax on royalty and fees for
24. technical services in Section 115A will significantly
Recommend that withholding tax rate u/s 115A be restricted to 10%, as increase the cost of importing technology.
earlier.
Angels invest at an early stage where the concept of a
Share premium in excess of fair market value treated as income
fair market valuation is virtually impossible as they are
Taxing under the head “income from other sources” for excess
driven by the track record of the team, their personal
consideration received by a company from a resident for issue of shares
view of the potential of the company and the market
over the face value or their fair market value has a negative impact on
and the space in which it operates, etc. The valuation is
Angel investors and start-ups
less systematic and driven more by gut feel and
negotiation between the investor and the entrepreneur.
25. Recommend Angel investors should be exempted from this. Criteria for
Definition of fair market value cannot be determined by
exemption to be developed. Till then any investment made by a domestic
any value. Angel Investors are critical for
investor (individual or corporate entity), be exempted from this provision
entrepreneurship in any country. They invest at a start-
provided that the investment is below ₹ 5 crores and the company does
up stage when there is almost nothing on the ground,
not collectively receive more than ₹ 10 crores within 6 months of such an
mostly an idea and the risk is extremely high and no
investment
finance is available from recognized sources such as
Banks, VC Funds, etc.
Taxation of Unlisted Shares Residents are more onerously taxed than non-
The tax rate for all assessees in respect of long term capital gains from residents, though the nature of income is identical.
26.
unlisted companies be reduced to 10% to maintain parity. Causing domestic investors being less competitive than
international investors
Additional income tax on distributed income by company for
buyback on unlisted share The provisions would result in double taxation.
Withholding tax rate of 20% on profits distributed by unlisted companies to Reduces the confidence of foreign investors in India
27.
shareholders through buyback of shares. and would act as a significant hindrance to free
movement of capital and earnings.
Recommend to withdraw blanket rate of 20% on all buy backs.
Clarifications on indirect transfer rule in section 9
Owing to lack of clarity currently in section 9 on many
Explanation has been added to section 9(1)(i) that the sites of capital
aspects relating to the indirect taxation rule, foreign
28. assets being shares/interest in a foreign entity, directly or indirectly
companies acquiring overseas companies (with
deriving value from assets located in India, shall be deemed to be in India.
subsidiaries in India) or undertaking overseas
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