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IT-ITeS seeks clarity on transfer pricing, wants manufacturing boost

26 February, 2013

The $72 billion Indian IT-ITeS sector, which can easily qualify as one of the largest employment-generating sectors in the country with 22 lakh odd professionals in its fold, has some well-defined expectations from Budget 2013. According to industry leaders, entrepreneurs should be entitled to special provisions and subsidies, especially those operating in tier II and tier III cities. Another major issue is the transfer pricing guidelines, which should be rationalised at the earliest. Industry veterans also note that R&D boost and measures to step up IT manufacturing are other key factors that should be addressed to ensure future growth.

According to Dr Ganesh Natarajan, vice-chairman and CEO of Zensar Technologies and member of the chairmen’s council at the IT industry body NASSCOM, there are clearly three points that need to be taken care of. First, the industry needs more clarification regarding the transfer pricing issue and a safe harbour needs to be there, he observed. The sector also requires a better environment and ecosystem for entrepreneurs and there should be special benefits for companies that go to tier II and tier III cities. In addition, there must be STP (software technology park) equivalent schemes even for operations in small towns.

VCCircle has picked the four key budget expectations of the Indian IT-ITeS industry:

Clarity on transfer pricing and SEZ/STP benefits

According to the IT industry body NASSCOM, even R&D services should be made eligible for SEZ benefits. Moreover, the current SEZ policy should be revamped, with no minimum, contiguous land requirement.

The government had imposed a minimum alternate tax (MAT) of 18.5 per cent on SEZ units and developers in 2011-12. However, the SEZ Act 2005 promises units a five-year complete tax holiday on profits, followed by 50 per cent exemption on profits over the next five years and 50 per cent exemption on re-invested profits in the subsequent five years. Developers get a tax holiday for 10 consecutive years that they can choose in a bracket of 15 years.

Since the IT sector mostly deals with overseas markets like the US and the UK, there is a considerable amount of subjective judgment in arriving at the arm’s length price of an international transaction. NASSCOM, however, feels that transfer pricing guidelines should be rationalised and their domestic threshold should be raised.

Measures to step up R&D, innovation

“With manufacturing value addition in India abysmally low, a whopping $320 billion worth of electronics will be imported by 2020, which may exceed the annual oil import bill. Hence, in our recommendations, we have requested the government to abolish the inverted duty structure on IT components which will help revive the demand and promote manufacturing in the country,” said Anwar Shirpurwala, executive director at MAIT (Manufacturers’ Association For Information Technology). He further stressed the need for a long-term and comprehensive policy framework to encourage manufacturing in the country.

“There should be a re-classification of R&D and testing services as exports. The IT sector should be allowed to avail existing R&D promotion schemes and the benefit of the current DSIR scheme should be expanded to include computer software,” the spokesperson added. A tailored incentive model has to be developed for R&D in the IT-BPM sector, extending it to products and services.

Boost for entrepreneurs and tier II/tier III locations

For enabling entrepreneurship, NASSCOM wants the compliance burden should be eased through the removal of unfair levies and royalty on internet downloads, which will act as a barrier to usage. Also, in order to improve competitiveness in the IT-ITeS sector, the industry body has asked the government to make available promised benefits by streamlining administration. It has also suggested that India should be built as a cyber-secure nation through budget allocations and training of cyber security professionals, and tier II & III locations should be promoted for inclusive growth.

Better tax policies for hardware sector

MAIT also demands removal of basic customs duty on IT accessories in the upcoming budget. Since those accessories such as adapters, batteries and speakers are critical components, imposing customs duty on the same increases manufacturing costs, impacting the pricing for end-customers and also disincentivising manufacturing.

The hardware sector also requires enhancement of MRP abatement. Considering the prevalent rates of excise duty and sales tax in addition to logistics/transportation costs and dealer margins, it recommends that the anomaly should be corrected by increasing the abatement from the existing rate to 40 per cent on IT products.

(Edited by Sanghamitra Mandal)


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IT-ITeS seeks clarity on transfer pricing, wants manufacturing boost

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