The government’s interim budget for fiscal year 2024-25, which will be the Hon’ble Finance Minister’s sixth consecutive Budget, is scheduled to be presented on 1 February 2024. While the interim Budget is not expected to contain any big bang announcements, here is a listing of some key developments during the year gone by and expectations from the IT sector, from a tax perspective.
Schemes for “Make in India”
The PLI scheme and other programmes, such as the India Semiconductor Mission, Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS), Modified Electronics Manufacturing Clusters Scheme (EMC 2.0), for electronics manufacturing, that have positioned India as a compelling manufacturing hub.
The PLI scheme 2.0 for IT hardware covering servers, laptops, tablets, etc., announced earlier this year, saw over 40 applications, with 27 receiving the go-ahead. In contrast, out of the US$ 10 Bn commitment to the semi-conductor industry in 2021, a majority of the outlay is still to be tapped into. This was meant to cover incentives for setting up of display fabs, ATMP/ OSAT facilities as well as various stages of development as part of a design-linked incentive.
While the Government has witnessed significant traction, the benefits of the incentive programme are yet to be reaped by companies. We have also seen an added push for PLI to cover for the budding space sector as well.
Such numerous PLI and other schemes are expected to broaden the manufacturing ecosystem. A strong ecosystem that allows progressive localisation and a longer window for filing intent and completing the investments before coming into production, will provide an effective opportunity to future investors to consider the schemes while finalising their investment decisions.
Similarly, Manufacturing in Customs Bonded Warehouse i.e., the MOOWR scheme, is one of the most promising schemes, providing impetus to domestic manufacturing and offers exemption/deferment of duty applicable on capital goods and inputs at the time of import. However, the Finance Act 2023 made a crucial amendment in the MOOWR scheme by removing the upfront exemption of GST (ie, IGST on imports). This is likely to impact the working capital of companies. While the Section has not been notified yet, industry is hopeful that the government will keep the implementation of the proposal in abeyance in order to encourage manufacturing initiatives under this scheme.
Data storage, security and localization
India’s data center sector is set for exponential growth, driven by a thriving digital economy and regulatory frameworks that require data localisation within the country.
As India’s economy grows and touches the $5 trillion mark, the need for robust physical and digital infrastructure will only increase. A key factor weighing in on additional investments flowing into this sector, is the 18% GST cost incurred by companies. Allowing GST input tax credit paid on various capital goods and credits related to construction of immovable property, will help ease costs. Clarity on export status where such services are exported will also help relieve some of the disputes being faced by companies and align with the government objective of not exporting taxes.
Rise of Global Capability Centres (GCCs)
The India GCC journey continues to see growth with more than 1,580 GCCs currently in India employing 1.66 million people. The matured technology ecosystem, talent and cost advantage, politically stable environment amidst global uncertainty, are the main factors for India being a successful GCC global leader and a preferred location for set up.
In the next two years, India has the potential to host up to 1,900 GCCs, employing 2 million people with a revenue of US$60-80 billion.
The key ask from GCCs is to expand the scope of refund provisions under GST to allow for refund of ITC paid on capital goods.
Encouraging investments in Research and Development (R&D)
The government should encourage technological innovation and promote competition through increased incentives and tax concessions for R&D and attract industry players to invest more in innovation and R&D. The government may consider restoring weighted deductions for R&D expenditure and donations to scientific research institutions that were available in the past. By reinstating these tax incentives, India can further foster innovation and position itself as a hub for cutting edge R&D activities.
Clarity in respect of online gaming
In a digital era, it is common to see online platforms luring customers by offering promotional schemes, such as ‘spin the wheel’ or ‘scratch card’, on completing a prescribed number of transactions. The intention is to market a product/ service offering and not participate in a typical game with the intention to win. Clarity should be provided by way of a circular capturing activities referred as “online game” for the purpose of discharging the burden of withholding tax obligation under Section 194BA.
As the economy continues to recover post the pandemic, the technology sector has been witnessing steady growth. Stability propelled by favourable policies would be critical for the sector to continue to see an upward trajectory of growth in the coming months.
By Madhava Yathigiri, Partner, TMT-Tax Leader, Deloitte India with inputs from Sangita Prakash, Director.