Technology Sector's Expectations From Budget 2016

The IT/ITeS sector, one of the largest contributors to exports in the country, has played a vital role in shaping the overall growth story of India. In view of the challenging business environment, the sector has significant expectations from the ensuing Union Budget 2016 on the tax and policy initiatives front.

Small and Medium Enterprises (SMEs) as well as technology start-ups are keenly awaiting a policy framework that might encourage budding entrepreneurs to develop and build innovative solutions which might foster further growth and development of the nation. Provisions enabling offset of manpower training costs, at least for start-ups such that they can effectively compete with their global counterparts, could render the 'Skill India' programme of the Indian government to be more successful. Greater clarity on the contribution of this sector towards the 'Digital India', 'Smart cities' and 'Make in India' initiatives is also needed.

To promote transparency and IT security amongst various e-governance and 'Digital India' initiatives, it is important to promote Free/Libre and Open Source Software (FLOSS). To further simplify the ease of doing business in India for start-ups, NASSCOM has also recommended that audit procedures be replaced by self-certifications for the initial years.

The 19 point 'Start-up India' initiative with incentives such as exemption from income- tax for the first three years, non-levy of income tax on investments received above the fair value, exemption from capital gains upon investment into start-ups/start-up fund, hassle-free exit policy, set-up of an INR100 billion fund, etc. is a step forward in the right direction towards nurturing start-ups and the industry is keenly awaiting enabling provisions in the ensuing Budget.

The recently announced proposed sunset date for claiming SEZ benefits (for new units/developers) has taken the sector by surprise, and expectedly, the sector is pushing for its deferral. The sector has also put forth its demands for abolishing Minimum Alternate Tax and Dividend Distribution Tax on SEZ developers/units, reduction of MAT rates, carry forward of MAT credit without time limits and lowering of the withholding tax rates on software.

With software being subject to withholding tax in foreign jurisdictions, the sector is also awaiting the rules on foreign tax credit. With a view to incentivise investments in IT infrastructure, the sector expects that the meaning of 'new assets' under Section 32AC of the Income-tax Act, 1961 should include 'computer' and 'software' as well.

A lot of questions have been raised by large Indian IT houses over the recently announced draft Place of Effective Management guidelines, who, inter alia, fear that their foreign subsidiaries may be treated as 'residents' in India, leading to potential double taxation. The industry is lobbying hard for deferral of these provisions.

On the indirect tax front, the sector is expecting parity for STPI/ EoU units with SEZ units as regards exemption from payment of service tax on inputs, instead of the existing tedious refund claim process for STPI/ EoU units. Given the pending GST legislation, the sector is wishing for clarity from the Government on classification of software either as 'goods' or 'services' to eliminate the dual levy of service tax and VAT as an immediate remedial step.

The technology sector is plagued by high stake Transfer Pricing (TP) litigation and is demanding an increase in the threshold limits for mandatory TP audit and for maintenance of TP documentation leading to lower compliance costs. Besides, the sector also expects lowering of safe harbour margins from the current range of 20 to 30 per cent to make safe harbour a viable option.

Having made the right noises through the recently announced initiatives, the government would do well to cater to the demands of the sector in this year's Union Budget which should provide the much needed impetus for restoring investor confidence, incentivising fresh investments within the sector as well as facilitating exports.

(The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG in India.)