The Indian IT industry has looked forward to the Union Budget in recent
times. That’s the time when taxes and duties are slashed and sops are handed
out to fatten India’s golden egg-laying goose. But this time around, industry
is worried. The reason–the Kelkar Task Force Recommendations, which, if
adopted, will impose a huge tax burden on the industry.
Kelkar checks in...
So what does the Kelkar recommendations bode for Indian IT and its players?
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The task force has recommended the elimination of tax incentives under
Sections 10 A and 10B of the Income ATax Act–"for all tax payers other
than those engaged in manufacturing computer software". This is the Kelkar
Catch...These two Sections (10 A and 10B) deal with tax incentives available for
exports by companies operating out of special trade zones as well as 100-per
cent EOUs (export-oriented units), especially software companies. These
exemptions would no longer hold if the finance minister adopts the
recommendations of the Kelkar Task Force. The worst affected by such a change
would be upcoming BPO and ITeS companies.
It has come as no surprise that Nasscom is hotly opposed to a revocation of
the tax benefits. Says Nasscom president Kiran Karnik, "The outstanding
success of the IT software and services sector is an example of what government
support and government-industry partnership can do. To build on this, the
government should honor the commitment of full exemption from taxes on export
profits till 2010, since investments and business plans have been made on the
basis of that commitment."
That is something that the industry is unanimous about.
The MAIT Bait |
MAIT has released a list of recommendations for Union Budget 2003-4. Among other things, the apex body has recommended the following measures: |
n Excise duty on all IT products should be brought down to 8% from existing 16%. This, claims MAIT, is essential to address the issue of grey market and also to reduce the price of IT products |
n Rectify inverted tariff structure arising out of implications of IT Agreement of the WTO. MAIT has recommended that there be: |
l No customs duty all capital goods for IT/electronics/telecom manufacturing |
l No customs duty on all raw material inputs including dual usage items |
l Simplify procedure for exports and imports by reducing the turnaround time from the existing seven to ten days to international standards of less than a day, the government should: |
l Introduce self-declaration based periodic processing model |
l No physical controls |
l All conciliation of data/duties to be post-clearance |
"It will be really good if the government does not take away any
incentives already committed–like income tax benefits under 10 A and 10B.
Taking away promised incentive like tax benefits would have negative effect, as
companies are now signing multi-year outsourcing contracts," says Pawan
Kumar, president and CEO of Vmoksha.
Moreover, revoking the tax holiday would affect high-growth segments like
ITeS and business process outsourcing adversely.
"The need of the hour is to create an ecosystem that will help the BPO
segment grow in India. For this, both fiscal and non-fiscal measures need to be
adopted by the government. Adopting the recommendations of the Kelkar Task
Force, especially with respect to the provisions in the 10 A and B of the Income
Tax Act, might be detrimental," says Raman Roy, president & CEO of
Wipro Spectramind.
The wishlist
Industry bodies like Nasscom and MAIT have rolled out their own
recommendations for the Union budget. (see boxes). Some of these recommendations
have been longstanding demands of the industry. Take, for one, the Nasscom
recommendation to the government to pursue vigorously the ‘Totalization
Agreement’ with the US. Though there’s been some talk about such an
agreement between India and the US for nearly a year-and-a-half, nothing
concrete has come out so far.
Nasscom’s Recommendations |
Nasscom has released a list of recommendations for the forthcoming Union Budget for financial 2003-04. Among other things, the apex body has also recomm-ended that... |
n The tax incentive under 10A and 10B of the Income Tax Act continue till 2010, as committed |
n Demergers and amalgamations be specifically excluded from the provisions of Sections 10A/10B. |
n Tax holiday benefits under Sections 10A/10B be extended to supporting manufacturers to the extent of value addition. |
n The government amend the definition of ‘royalty’ to provide that income derived from sale of shrink-wrapped software not qualify as royalty |
n The Softex form as well as Forms A and B be dispensed with or be made into ‘Self-declaration Forms’ to avoid unnecessary paperwork and processing delays |
n A tax moratorium be imposed on e-commerce, at least for the next five years |
n Companies operating under the STP scheme be allowed to operate without the requirement of customs bonding and allowed to import duty-free goods without prior approval from relevant authorities |
n All taxable services provided in relation to software (both computer and IT) be exempt from the levy of service tax. And, that services like on-line information, database access or retrieval and data processing within banking and financial services, which relate to software, also be exempt from the levy of service tax |
n The compulsory 3% of the e-governance spending on IT be ensured, not only in hardware but in software and services as well, in the proposed ratio of 40:30:30 |
n Import and re-export of equipment for embedded software work be another area where Customs be made far more positive |
Totalization agreements provide that an individual be covered under the
social security system of only one country, usually the home country (in this
case India). Since employees of Indian companies are already covered in India
under various schemes like the Employees’ Provident Fund, employees of these
companies who may work on onsite projects need not be again brought under the US
Social Security. Presently, 18 countries have totalization agreements with the
United States.
"A totalization agreement with the US will save about 17% paid by Indian
companies for onsite employees as social benefits, which would come to these
employees only if they live in the US for 40 quarters (10 years)," says
vMokhsha’s Kumar. In fact, even the Kelkar Task Force report has recommended
that " the Government of India take immediate steps to negotiate with
foreign governments to enter into a comprehensive totalization agreement…"
The report has also observed that the annual loss to India because of absence of
totalization agreement was "$500 million, and such losses were increasing
rapidly".
A longstanding demand of the Indian hardware industry has been
"rectification of the inverted tariff structure". As per the WTO
agreement, India is committed to enter into zero-duty regime for all IT and
telecom products by 2005. Domestic manufacturers will continue to import raw
materials, components and sub-assemblies as inputs. If these imports are not at
zero-customs duty, there’s likely to be a situation where finished goods will
be zero-duty, whereas raw materials would be charged duties. This is called an
"inverted tariff".
Says Venkat Kedlaya, MAIT chairman (southern region), "Normally, we
expect tariffs to be lowest for raw materials, rising as value addition
increases in the imported product. So, if imported finished products are at zero
duty, so should all inputs that go into manufacturing. We also believe that all
capital goods that go into manufacturing should also be at zero duty to offer a
level playing field vis a vis international manufacturers."
"Most international manufacturers based in East Asia are in free trade
zones and pay no duty on capital goods. We also expect that all dual-use
components and raw materials also have zero duty–for example, certain
electrical components could be used by IT as well as non-IT industry players.
When such inputs are used by IT, there should be no duty. We also expect that
these changes will be made now so that domestic manufacturers have time to
adjust to the zero-duty regime in 2005," he adds.
The Kelkar Catch |
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The Kelkar Task Force recommendations have raised a storm in the IT cup. Here’s an excerpt from the recommendations submitted by the Task Force... |
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"We recommend that in the case of taxpayers engaged in manufacturing computer software, the Government of India take immediate steps to negotiate with foreign governments to enter into a comprehensive totalization agreement leading to a single-point incidence of taxes. It may be noted that a number of countries across the globes already have totalization agreements with each other, related to payment of social security and other taxes. However, in the interim, the Task Force recommends the following alternatives..." |
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The Task Force could not arrive at unanimity on the preferred alternative from among the above two" Source: Ministry of |
The hardware industry has, in the past, accused governments of giving them a
step motherly treatment. But this time around, it hopes that things would be
different.
As MAIT executive director Vinnie Mehta says, "IT manufacturing in India
is faced with several disability factors that add up to almost 16-20%–a
significant proportion–of the manufacturing cost. These can only be overcome
by a progressive policy that can help reduce the transaction costs through
simplified procedures." As for emerging sectors like the semiconductor
business, a proactive approach will help India Inc grab a piece of the global
market, which is projected to grow at a rate of 22%, to $173.1 billion in 2003.
"Currently, most of the semiconductor business is with companies in the
United States. However, there is a substantial opportunity for business with
Japanese semiconductor companies. A large of this trade currently goes to China
due to the difference in the withholding tax (WHT) rates. The WHT between India
and Japan is 20%, whereas between China and Japan, it is nil. The government
needs to set up a financial task force to set this anomaly right quickly,"
says Shyam Kodavarthi, general manager (business development) at Sasken’s
semiconductor business unit.
Ask him about his wish from the Budget, and he says–"The Indian
semiconductor design companies invest a lot on EDA tools to service customers.
There is a difference of up to 40-50% in EDA tool costs, compared to the US and
other countries, which reduces the cost competitiveness of Indian IC design
houses. A tax incentive to EDA tool companies would offer a level playing field
to Indian IC design houses."
Ganesh Natarajan, the global CEO of Zensar Technologies is also strong in his
view of the situation. "An alarming statistic recently revealed by the
Confederation of Indian Industry is that to achieve the 8% growth rate that is
the target for the country, it will have to be industrial growth that moves from
the current level of 6.5% to 13% in the short term–and stabilize at
double-digit growth levels in the medium term–clearly, a tall order for Indian
manufacturing. No wonder then, that even some of our policy planners and the new
breed of young politicians have begun to consider manufacturing a lost cause and
are looking at services to achieve the miracle that India needs for true
transformation."
In conclusion...
Like most other Budgets, this one too will be discussed, debated and
dissected across homes and corporate boardrooms through the country. But with
the clock ticking away on the WTO deadline and Indian IT limping back to
recovery, all eyes in the Indian IT world will be focussed on Union finance
minister Jaswant Singh as he rises to present the annual Union budget for FY
2003-04.
TV Mahalingam With inputs from
Sarita Rani