Union Budget 2025 | Tech sector seeks safe harbour rules changes, higher R&D spend

India’s tech industry is looking to the upcoming budget for modifications in the safe harbour rules, enhancement in outlay for research and development, especially for artificial intelligence and greater emphasis on upskilling, as the industry feels it is imperative for India to build upon its successes and dominate the global tech ecosystem.

Finance Minister Nirmala Sitharaman is slated to present the Union Budget 2025 on February 1. “We have requested the government to implement measures for giving effect to the earlier announcement to make safe harbour rules attractive and streamline transfer pricing assessment procedures. This will attract growth of global capability centres and improve ease of doing business for the Information Technology-Business Process Management (IT-BPM) industry,” tech body Nasscomm said.

Safe harbour rules protect a company from the penalty of underpayment for estimated taxes and involve setting prices for transactions between related entities, such as a parent company and its subsidiary. This becomes important as transfer pricing disputes are a regular occurrence between businesses and tax authorities.

The industry is also looking for enhancement in research and development (R&D) incentives through weighted deductions as well as doubling down on upskilling schemes, industry stakeholders who spoke to DH said. 

“Investing in R&D of artificial intelligence and offering tax incentives or subsidies to companies investing in AI technologies are some of the immediate measures that can be explored at this point in time. The government could frame regulations in a way that promotes tactical growth,” said DD Mishra, Vice President - Analyst, Gartner. 

Relaxation of ESOP taxes

There is also a call to clear the backlog of appeals pending with the appellate authorities for a long period of time. “As in the case of the Dispute Resolution Panel (DRP), the Finance Minister should introduce mandatory timelines for the disposal of appeals by the Joint Commissioner of Income Tax (CIT),” suggested Himanshu Parekh, Partner, Tax, KPMG India.

Meanwhile, the startup industry has called for deferring perquisite taxation on (Employee Stock Option Plan) ESOPs until the stage of sale of shares, as against taxation upon exercise of ESOPs, aligning with the relaxation already provided to registered startups.

Currently, beneficiary employees have to pay income tax when they exercise their ESOPs or convert it into shares and then again, capital gains tax at the time of selling the stocks. This change would ensure that employees are required to pay tax when they actually receive the consideration upon sale of shares. 

India has been witnessing a funding winter with Private Equity - Venture Capital (PE-VC) firms investing $31.1 billion in Indian companies in 2024, lower by 5 per cent compared to  2023, according to Venture Intelligence data for 2024,

“I think around 80-85 per cent of the funding came from funds registered overseas. If that is the case, it means that the ecosystem is still heavily dependent on overseas investment than domestic. It's not that India is not capable of upping its exposure in this respect but it needs some conducive framework which allows larger participation,” observed Anil Joshi, Managing Partner, Unicorn India Ventures.

Apart from this, a smooth clearance system for approvals is also a key ask. “Introducing a digital single-window clearance system for all government approvals including integration of labour and environmental compliances and automation of winding up process for business will significantly reduce delays and enhance the ease of doing business,” said Sanjay Khan Nagra, Partner, Khaitan & Co.

Union Budget 2025 | Nirmala Sitharaman, who continues to be Finance Minister, will present her record 8th Union Budget this time. While inflation has burnt a hole in the pockets of 'aam janata', reports suggest there might be a tax relief for those making up to Rs 15 lakh per year. Track the latest coverage, live news, in-depth opinions, and analysis only on Deccan Herald. Also follow us on WhatsApp, LinkedIn, X, Facebook, YouTube, and Instagram.