Budget: How tax impacts IT sector

BANGALORE, INDIA: The IT industry expectations were muted in the drum-up to the budget though respite by way of roll-back on Minimum Alternate Tax (MAT) on SEZs would have definitely been welcome. However, that was not to be.

Apart from some relaxation on the individual taxation, corporate taxes are mostly untouched. The Finance Minister has also proposed to increase the service tax rate to 12% and include almost all services (except a small list) in the ambit of service tax. 

A lot of tinkering has been done in respect of international tax provisions.

The big news is the introduction of General Anti Avoidance Rules (GAAR), which gives wide powers to the tax authorities to question the tax avoidant nature of transactions. Since the bilateral tax treaty provisions would not be applicable if GAAR is invoked, this is expected to increase tax uncertainty for taxpayers. It also causes ambiguity on the fate of existing structures and commercial arrangements.

The definition of “royalty” under the Income Tax Act, 1961 has been amended to specifically cover computer software licenses. This resonates with the department’s intention to tax the revenue streams from such transactions. On the other hand, taxpayers would argue that the relevant bilateral tax treaty interpretation would still prevail and safeguard against taxation.

Further, the acceptable variation limit for transfer pricing adjustment has been specified at 3%, as opposed to the 5% variation range earlier available.

There are positives in the budget which the industry would welcome. The Advance Pricing Agreements (APA) have been introduced to reduce long-drawn litigations on transfer pricing. It will be interesting to see if the APA route can be explored for existing litigations.

On the outbound side, there is a one-year extension of rationalized tax rate of 15% (as opposed to normal corporate tax rate of 30%) for dividends received by Indian companies from foreign subsidiaries. Further, the procedure for service tax refund of input credit for exporters has been simplified.

On the whole, this budget seems to avoid both extremes of being either enthusiastically welcomed or harshly criticized by the IT industry.

 (Naveen Aggarwal is from KPMG)