Nasscom for removal of MAT on SEZ,clear transfer pricing norms

Software body Nasscom has urged the government to withdraw the Minimum Alternative Tax (MAT) on SEZ units and provide clarity in transfer pricing norms to help create a conducive environment for the growth of over USD 70 billion Indian IT-BPO sector.

In its Budget submission to the Finance Ministry, Nasscom has recommended that MAT on SEZ income be withdrawn as it is counter to the long-term policy announced by the government through the SEZ Act.

"MAT should be withdrawn at least in respect of SEZs which have already been notified so that economic viability of these SEZs is protected. Moreover, MAT rate should be brought to one-third of the corporate tax rates i.e., to 10 per cent (international norms to be applied)," it said.

This, Nasscom said, would help in creating a conducive policy environment to sustain and grow the IT-BPO sector in India.

The MAT was increased to 18.5 per cent last year. This impacted the Indian IT firms, especially smaller players, as they were moving to SEZs after the exemptions under the Software Technology Parks of Indian scheme came to an end.

Nasscom said policy changes like replacing the exemption in March 2011 with refund mechanism for input services and the imposition of MAT from Assessment Year 2012 has diluted the incentive and created deterrent for future growth of SEZs.

On the issue of transfer pricing, Nasscom has recommended a three-pronged approach.

"Firstly, for past and current claims, 'Safe Harbour' provisions be used to resolve all outstanding cases. Second, introduce Advance Pricing Agreements (APA) to help set fair and transparent pricing of transactions and provide certainty to firms in the future.

"Thirdly, review the structure and procedures of the Dispute Resolution Panel to ensure that the mechanism is effective in achieving its mandated purpose," it said.

This will help expeditiously clear the backlog and provide certainty in the future for transfer pricing issues, Nasscom said.

Transfer pricing deals with the technique where parent companies sell goods and services to subsidiary entities at an inflated price to deliberately reduce profits and tax liability.

The law requires that goods and services should be sold to subsidiary companies at arm's length price -- the price at which goods are traded between unconnected companies.

Taxing these units has become a complex area for the revenue department, with the government often disagreeing on the profits declared by a foreign company for its Indian unit.

Nasscom has also sought support for small and medium enterprises, which are facing challenging business environment amid the uncertain and volatile economic scenario.

"While the SEZ Act provides for income tax exemption for a defined period, small companies cannot set up in SEZ due to restrictive conditions in this act. This has created a non-level playing field wherein smaller companies that need support are unable to access this," it said.

Nasscom has recommended that Department of Information Technology as the nodal ministry for the sector implements a special scheme, wherein small and medium companies can get support either in the form of tax reimbursement or employment linked incentives.

Similar provisions should also be applicable for companies that set up operations in Tier II and III cities in the country.

"For SMEs operating in the domestic market, deduction of 10 per cent TDS under section 194J leads to blockage of funds as these companies are most often not profitable or have very low profitability," Nasscom said adding that for technical services, rate of
deduction of TDS be brought down to two per cent.

The body has also proposed setting up guidelines and statutory provisions in relation to use of legal packaged software and other services which are electronically downloaded to help avoid uncertain taxation.

"It is suggested that the guidelines should factor in practices in other advanced economies... to ensure that there is no double taxation, appropriate guidelines would need to be outlined for various e-commerce transactions like database subscription, online software downloads, cloud computing, webhosting and data warehousing, etc," it added.

Nasscom has highlighted other issues like delay in service tax refunds and dual levies on software as well.