by March 7, 2012 0 comments



Nasscom has submitted its recommendations for the Union finance Budget 2012 for consideration to the government. The focus for Nasscom’s submission is to create a conducive policy environment that can help sustain and grow the IT-BPO sector in India. Specific suggestions relate to tax issues, transfer pricing, and support for the SME sector.

Special Economic Zones – Minimum Alternative Tax (MAT): The SEZ Act was enacted by the Government of India in 2005 to stimulate exports and generate large-scale employment. The most salient incentive has been income tax exemption of export profits which has contributed to the scheme’s success in attracting major investments. However, various policy changes such as replacing the exemption in March 2011 with refund mechanism for input services, and the imposition of the Minimum Alternate Tax (MAT) on SEZ units from AY’2012 has diluted the incentive and created deterrent for future growth of SEZs.
Nasscom has recommended that the MAT on SEZ income may be withdrawn as it is counter to the long-term policy announced by the government through the SEZ Act. Alternatively, MAT should be withdrawn at least in respect of SEZs which have already been notified so that economic viability of these SEZs is protected. Moreover, MAT rate should be brought to 1/3rd of the corporate tax rates i.e., to 10% (international norms to be applied).

Transfer Pricing Issues: The IT industry has recently been served some unreasonably high assessments based on transfer prices creating issues of litigation for a number of companies. The finance minister himself had recognised the salience of transfer pricing issues back in his Budget speech of 2009 and indicated the way forward, including “Safe Harbor” provisions, a Dispute Resolution process and the use of Advance Pricing Agreements (APA).

Nasscom has recommended that a three-pronged approach be taken to expeditiously clear the backlog and provide certainty in the future for transfer pricing issues. Firstly, for past and current claims, “Safe Harbour” provisions will be used to resolve all outstanding cases. Secondly, introduce Advance Pricing Agreements (APA) to help set fair and transparent pricing of transactions and provide certainty to firms in the future. Thirdly, review the structure and procedures of the Dispute Resolution Panel to ensure that the mechanism is effective in achieving its mandated purpose.

Support for SMEs and tier II/III cities: With an uncertain and volatile economic environment, small and medium companies in the country are facing an extremely challenging business environment. While the SEZ Act provides for income tax exemption for a defined period, small companies cannot set up in SEZ due to restrictive conditions in this Act. This has created a non-level playing field wherein smaller companies that need support are unable to access this. As the benefits of Section 10A/10B have ended and DTC has not yet been implemented, a special scheme for supporting SMEs and tier-II/III cities is being framed by Department of Information Technology.
Nasscom has recommended that Department of Information Technology as the nodal ministry for the sector implements a special scheme, wherein small and medium companies can get support either in the form of tax reimbursement or employment linked incentives. Similar provisions should also be applicable for companies that set up operations in Tier II/III cities in the country.

For SMEs operating in the domestic market, deduction of 10% TDS under section 194J leads to blockage of funds as these companies are most often not profitable or have very low profitability. Nasscom has recommended that for technical services, rate of deduction of TDS be brought down to 2%.

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