Pre-Budget expectations of the IT and BPO industry

DQW Bureau
New Update


face="Times New Roman, serif">Contributed

style="font-weight: normal;">Kartik

Rao, Associate Director-Tax & Regulatory Services, Ernst &



Indian IT and BPO industry, which is just emerging from the economic

downturn is expected to deliver an impressive growth of approximately

19 percent during FY '11. While the industry is cautiously

optimistic about its growth prospects, the macro-economic conditions

in the US and European markets, wage inflation and President Obama's

protectionist policies have forced the industry to present a

conservative outlook.

face="Times New Roman, serif">In

the backdrop of this challenging economic scenario, the Finance

Minister will be presenting the Government's proposals in Budget

2011. On the direct tax front, the industry would hope for an

extension of the tax

holiday scheme for Software Technology Parks (STP), which is

otherwise set to expire on March 31, 2011, by at least another year

till March 31, 2012. The increase in the rate of Minimum Alternative

Tax (MAT) from 15 percent to 18 percent in Budget 2010 has not gone

down well with the industry and a roll back of the MAT rate to 15

percent would certainly be viewed positively.

face="Times New Roman, serif">Transfer

pricing has emerged to be one of the most litigious issues for the

industry and there is an urgent need to face="Times New Roman, serif">operationalize

the safe harbor provisions, which


first announced in Budget 2009.
face="Times New Roman, serif">The

Government should also consider the implementation of an Advance

Pricing Arrangement (APA) framework in this year's budget. These

measures would definitely help reduce transfer pricing related

litigation. On the

indirect tax front, there is an urgent need to address the issue

around the dual levy of service tax and VAT on standard or packaged

software. As a result of such conflicts, the effective indirect tax

burden on software has gone as high as 14-15 percent in recent years.

The applicability of service tax exemption when services are

provided to units and developers in SEZs has also been a bone of

contention in view of certain interpretation-related issues. In

order to resolve this, it may be more prudent for the Government to

equate supplies to SEZ as akin to exports outside India.

face="Times New Roman, serif">The

Government should also focus on improving the procedure and

administration around refund of input tax credits (CENVAT credits)

relatable to services exported outside India. This would help unlock

the significant quantum of pending refunds due to service exporters. face="Times New Roman, serif">The industry is hoping

that the Government would deliver a growth-oriented tax policy

framework in Budget 2011 which would help it emerge unscathed from

this challenging economic scenario.