The Hindu Business Line : Bring software tech parks holiday scheme on par with SEZ

Continuation of the tax holiday for software technology park (STP) units beyond 2009 is a key concern area for the industry, particularly for SMEs which are already operating on thin margins, reeling under the impact of a much depreciated dollar and u nable to access affordable SEZ space as a tax efficient alternative.

The Government could at least bring the STP holiday scheme on par with the SEZ scheme, to ensure parity and bring relief to this important segment. The introduction of minimum alternate tax (MAT) on STP units last year in contradiction to the original legislative intent of according tax free status to exporters, only emphasises the increasingly myopic approach adopted in our law making process; the MAT ought to be rolled back.

The industry is also likely to suffer on account of continuing ambiguity and litigation in relation to a multitude of issues associated with the existing tax holiday provisions (eg set up issues, eligibility of specific types of activities and income, manner of computation of the deduction, M&A transactions, treatment of unabsorbed losses and depreciation, MAT, subcontracting etc). Greater clarity, predictability and certainty in the law and a less costly, painful and time consuming tax administration process will benefit both industry and the revenue.

Advance pricing

The Government should also introduce advance pricing arrangements to arrest the flow of long drawn complex transfer pricing assessments/adjudications that have delivered arbitrary and unfavourable results to several industry players in recent times.

To address the controversy on service tax versus sales tax on software development, detailed administrative guidance ought to be issued on the factors determining characterisation, after inviting expert industry inputs across a variety of fact patterns.

ITES are treated as ‘taxable’ services per se, whereas software development is treated as a ‘non-taxable’ service.

Accordingly, any input service tax or CVD on packaged software imports is ineligible for a refund/credit for software developers unlike ITES players who can claim a credit against their output service tax or pursue a refund in case they enjoy an export exemption.

ITES units have also been exempted from issuance of C Forms for securing re-imbursements of central sales tax on their inter-State procurements. However, the eligibility of software units to avail such exemptions continues to be challenged by the Revenue.

The Special Additional Duty (SAD) in lieu of sales tax which is levied on specified imports by DTA units can be credited against the output excise duty liability of manufacturers and availed as a refund by traders. However, no such credit/refund mechanism is available to service providers in the IT services or ITES segments. Such disparities in treatment across various segments ought to be addressed through appropriate amendments to the relevant laws or issuance of notifications.

With more than 70 per cent of all software products sold in India being pirated versions, the Government ought to invest significantly in both spreading awareness and more aggressive policing by law enforcement agencies. This will provide an impetus to R&D activity, attract further investment, create more IT jobs and also augment tax collections.

Given that only 20 per cent of the available pool of engineers in India is employable, our educational infrastructure requires urgent reform to meet the IT industry’s expanding requirements.

The Government should explore measures for incentivising further private investment in IT education and training, including potentially opening up FDI in this segment, establish standardised technical training courses that are more industry/job oriented and improve minimum accreditation norms for technical educational institutions.

In summary, a more focused approach at addressing the IT industry’s fiscal and non-fiscal pressure points, would better serve its interests.

(The author is Tax Partner, Ernst & Young)

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