Great Expectations From Budget

The General Budget of the Narendra Modi government will be the first concrete framework of the economic agenda that the government will be pursuing during the coming years. The hope that the budget will outline a comprehensive plan for reforms and boosting economic growth has been fuelling the stock markets.

Investors, businessmen and citizens are counting on the budget to be a bold step in the direction of achieving the promise that Narendra Modi made during his election campaign “Achhe din aane waale hain.” We interacted with several members of the IT community to learn about their expectations from the budget. Turn the page to learn about the great expectations that the IT sector has on its radar.

By Pupul Dutta and Heena Jhingan

Niranjan Bal
General Manager IT, Hindalco Industries
With the central government screening a promising future in their manifestos and schemata, the 2015-16 Union Budget is expected to be a good indicator of the government? development blueprint.

While there are many areas/ sectors/ sections which require serious repairs on all fronts, one has to allow the government some relief ?nder section problems of plenty….inherited in legacy”.

The main focus areas should ideally be the common man, but emphasis needs to be there on industry reforms and sops as well.

However, what remains to be seen is what will the government do for the tech industry in addition to all the above. With the oil barrel sending shivers down the global spine, and global economic slowdown hanging on the cards, the government may look at increasing the institutional investment in the information technology sector, trying to make things like a driving license, Pan card, Aadhaar Card, etc., available online. One needs to note that there are umpteenth number of processes that can be automated and made easily available to public. This will at least open up the domestic market for IT companies.
Overall, it should be a budget that gets the manufacturing sector in India shining, and that shall bail us out of the global scenario today. After all, its the manufacturing industry that has a direct impact on GDP.

The coal block allotment settlement if executed in a logical manner, can provide a big relief to major business houses. While I refrain from writing anything about the process and the dust around the issue, one has to admit to the fact that business houses who have set up huge facilities in somewhat backward regions like Orissa and generated enormous employment, should be given something as a quid pro quo for their investment, and coal is an obvious item.

We may also expect some sops for export houses, especially to counter the global slowdown and the ever rising Chinese dominance. Defence is another investment area that needs to be under the microscope, especially with cross border terrorism and Pakistan? indifferent approach after NAMO government assumed complete power.

Anjani Kumar
CIO, Safexpress Private Limited
The expectations from this government is very high, especially when our PM has special focus to make India a truly digital country and IT capital of the world. We, in the technology sectors, are expecting a great transformation in terms of budget spending. People? biggest expectation is infrastructure improvement and better tax structure for service class.

IT Infrastructure We expect  huge focus on Internet bandwidth  and data connectivity improvement. Probably telecom companies should be given some kind of subsidy to provide last mile connectivity in remote areas. Internet companies should be given subsidy for optical fibre improvement.

IT Equipments – Excise duty on white goods should come down further.  All the equipments needed for network and bandwidth upgrade should become cheaper.

IT exports –  States should be given some incentive to create new tax free export oriented zones where IT is almost non-existent.

Logistics Industry  – We expect better infrastructure in terms of road network which is essential to move the goods. We also expect  some focus on GST which was started sometime back. There needs to be tax simplification rules for e-commerce industry, which has created chaos in some states in terms of taxes.

Umesh Mehta
Sr. VP & CIO – India at Jubilant Life Sciences
From this budget, we expect the government to bring down the excise duty on hardware so that it becomes cheaper. The government should consider lowering the cost for all the equipments required for network and bandwidth.

Secondly, the service tax should be brought down considerably. Given that most companies are now shifting to cloud-based models, levying of 12.36% service tax makes the implementation of technologies by a vendor very expensive.

Lastly, corporate tax slab should be lowered. While the salaried class benefits from tax exemptions announced by the government, the business class is made to suffer. There should be provisions for business class people too as this will further promote a healthy economic environment.

Vivek Sood
CEO, Uninor
The telecom sector will be keenly watching the Union Budget 2015-16 owing to the government? focus on building a digital India. There is an expectation of reforms that can help address some of the key concerns of the industry and drive growth.
Our strategic ambition of “Internet for All” is fully aligned with Prime Minister? Digital India. We hope that the budget will lead to relaxed norms for spectrum trading and sharing, M&As and availability of more spectrum.

Since there is a spectrum crunch in the country, limitations with regard to spectrum trading and sharing needs to be removed in order to achieve efficient utilisation of frequency airwaves.  The spectrum available for broadband over mobile networks, one witnesses a clear  shortage of spectrum required to provide “Broadband for All” in India. The government needs to make available more spectrum at a price that can make mobile services affordable for masses.

Rationalisation of taxes and levies will help the sector to sustain the cost pressures. Telecom sector is impacted by multiple taxes . The tax regime needs to be re-looked so that the service provider is not burdened and growth of LTE and 3G in the country is ensured. Building an affordable device ecosystem for the masses is key to achieving the government? broadband vision. Ensuring mobile access will be key in delivering basic citizen services.

Varghese Thomas
Director – Corporate Communications – India & Saarc, Blackberry
India is at the cusp of change, while the country has already witnessed a change in governance,  the country also awaits the much needed attention to address key sectoral concerns and initiation in vital initiatives to spur growth. The government needs to focus on critical sectors like information technology, manufacturing, healthcare, education, skill development and infrastructure.

A stable tax and regulatory regime is of paramount importance to attract and retain FDI as well as grow local business investments. We wish that the upcoming budget focuses on the aforesaid sectors uniformly and formulate policies and regulatory framework which helps foster economic growth, entrepreneurship and consumer spending.

Technology has already proved to be an efficient enabler of growth, thus it is imperative for us to increase our focus on Internet of Things (IoT) and deployment of M2M technologies in government services, enabling smart cities, enhancing the delivery of healthcare and education services to rural areas.

Overall the need for a progressive budget that aims to instil investor confidence and propel economic growth is just not an expectation to be met, but surpassed.

Naveen Aggarwal
Partner-Tax (IT/ITes), KPMG-India
Retrospective amendment in definition of royalty to tax payments for use online slots of a copyrighted article and software usage/ licensing is against internationally accepted principles of taxation, which does not consider payments for use of a copyrighted article as royalty. This has led to increase in cost and compliance burden of Indian payers and has caused significant hardships to the IT industry. It should therefore be clarified that payments for use of copyrighted software, made to non-residents, will not be covered under the definition of “royalty”.

The rate of tax on royalty/ fees for technical services (FTS) payable to non-residents was substantially increased from 10% to 25% (excluding surcharge and cess) by Finance Act, 2013. Considering that import of technology related services and products is critical for the IT sector and taxes on such payments are usually borne by the Indian importer. Thus, the erstwhile tax rate of 10% on Royalty/FTS income of non- residents should be restored, which will also be in line with tax rates on Royalty/ FTS rates in most tax treaties.

Imposition of Minimum Alternate tax (?AT on SEZ units by Finance Act 2011 has significantly diluted the tax incentives available to SEZ units, which has adversely impacted competitiveness and profitability of Indian IT sector. Keeping in view the Government? intention to revive the SEZs and make them effective instruments of economic growth, export promotion and employment generation, it is suggested that original exemption of SEZ units from MAT and DDT should be restored.
The IT industry is also embroiled in Transfer pricing litigation with the Indian Revenue Authorities, resulting in huge tax demands and increased compliance costs. Disputes over classification of captive research and development (R&D centers), characterisation of services, marketing intangibles and intra-group services from transfer pricing perspective have created uncertainty. Re-visiting notified safe harbour rules as well as providing certainty on transfer pricing norms should be addressed.

Section 35CCD of the Income-tax Act, 1961, allows weighted deduction of 150% on expenditure incurred on skill development by an ?ligible companyengaged in the business of manufacturing or production of article  and providing specified services, which does not include services provided by IT/ITeS sector. Given that the IT/ ITeS industry is a skill intensive sector, it incurs substantial expenditure on skilling/up-skilling and training of employees, appropriate amendment should be made in section 35CCD to provide such weighted deduction to IT/ ITeS sector.

Dual levy in the form of VAT and Service Tax on software supplied either electronically or through media has resulted in additional costs. Thus, clarity is needed on the applicability of service tax and VAT on these software transactions to reduce uncertainty and restore overall cost effectiveness of software companies, especially SMEs.

Partha Iyengar
Vice President & India Head of Research, Gartner
In continuation of the trend where the Indian IT industry”s needs to coincide with general industry”s requirements,  the wish-list  revolves around infrastructure revamp, ease of doing business, reforms especially around education, labour and tax, and IP protection. The industry should not continue to hold out for ?pecial sopsand should work on integrating itself into the overall fabric of Indian industry.

Sunil Khanna
President and Managing Director, Emerson Network Power, India
Government faces the task of presenting a growth oriented budget. . The country needs to strengthen its position as a manufacturing hub on the global platform, and as such investments and measures to give manufacturing sector a push is critical. We look forward to a growth oriented budget that will accelerate the growth to more than 8%.

What does MAIT expect from the budget?
by Anwar Shirpurwala, Executive Director, MAIT

Extension of special additional duty (SAD) exemption to all ITA goods manufacturers
Issue: Union Budget 2014-15 provided the much needed relief to domestic manufacturers of personal computers and tablets by addressing the issue of inverted duty structure suffered by the industry. However, only partial relief has been provided to the IT hardware manufacturing industry in limiting the exemption from levy of SAD to inputs/components used in the manufacture of personal computers (laptops/ desktops) and tablet computers.

Thus, the instant benefit of SAD exemption does not extend to other ITA goods where the issue of inverted duty structure continues and is more pronounced.

Impact: The impact of the inverted duty structure is such that it effectively makes direct import by end customers or trading (i.e, import and sale) of IT hardware/ ITA goods far more advantageous in comparison to manufacturing of these products in India; thus, making Indian manufactured goods uncompetitive for the domestic market.

Further, lack of clarity on the extension of the benefit of exemption up to the sub-component level has not completely mitigated the costs being incurred by a domestic manufacturer of personal computers and tablets.

Recommendations: It is suggested that the benefit of SAD exemption may be extended to all goods (including inputs, components and accessories as well as their parts and sub parts) when imported for use in the manufacture of ITA goods.

This suggestion, if implemented, should provide the necessary impetus to domestic hardware manufacturers by eliminating additional tax / duty costs incurred on account of an inverted duty structure.
Enhancement of abatement under maximum retail price (MRP) based excise valuation

Issue : MRP based valuation was prescribed under central excise law with the intent to ensure revenue neutrality without increasing end user prices while reducing central excise valuation related disputes.

Since the time of introduction of MRP based valuation in respect of IT products in 2008, the percentage of abatement has been lowered from the initially prescribed percentage of 22.5 % to 20 % with no escalation in the quantum of abatement thereafter.

Pertinently, a key reason for the reduction in abatement percentage was linked to a reduction in the median rate of excise duty from 12.36 % to 10.3 %.

Impact: While the total post manufacturing cost typically accounts for over 40 % of the sale price, the abatement  percentage prescribed at 20 % is significantly lower than the costs incurred.

The overall industry expectation was that, with the increase in rate of excise duties and VAT, the percentage of abatement would correspondingly increase. However, the percentage of abatement prescribed has effectively reduced, resulting in increase in cost at the hands of end customers.

Recommendations: The rate of abatement on all IT products should be increased from 20% to 40% under Notification No 49/2008 CE (NT) which prescribes the rate of abatement for products under MRP based excise valuation.
Deemed export benefitsin respect of information technology agreement (?TA goods

Issue: ITA bound goods (including their components when imported for use in manufacture of ITA goods) are exempted from the levy of basic customs duty (BCD) when imported into India
A domestic manufacturer of ITA goods shall be liable to pay excise duty RAT 10.30 % on the clearance of the manufactured goods to customers in India. In addition to the above, there is a levy of VAT/CST on the domestic sale of goods manufactured in India.

However, despite the numerous efforts of the Central Government, the IT hardware has failed to grow in India.

Recommendations: It is recommend that ?eemed exportsstatus be provided to ITA bound goods in order to improve domestic hardware manufacture industry.

Deemed export status if granted shall ensure zero rating of the supply of manufactured finished goods from excise duty levy perspective (excise duty exemption/ refund); and duty benefits (such as exemption / refund/ drawback) on inputs, components capital goods procured for use in the manufacture of such ITA goods. Such duty benefit shall effectively reduce the tax burden on ITA goods and potentially encourage domestic manufacturing of the same.

Speedy disposal of Special Valuation Branch (SVB) cases
Issue: Under the present provisions contained in the Customs Act, 1961 while there are procedures prescribed in respect of importing items/ goods from related parties located abroad; such procedures are often time consuming and uncertainties prevail over the time frame for assessment and passing of orders by the SVB authorities.

Impact: Especially delays in renewing the SVB order even when where there is no change in fact pattern has been causing severe hardship to companies delaying imports and enhancing transaction costs.

Further, insistence on SVB even where the goods attract nil rate of basic customs duty / are subject to MRP based CVD levy (such as majority of ITA goods) is causing severe hardship to the business.

Recommendation: In view of the above, it is recommended that a definitive time frame should be provided in the Customs Act for issuance of an SVB valuation order.

While in certain cases, due to the complexity of the matter involved, it may be difficult to issue an order within the time prescribed, suitable guidelines can be placed such as obtaining approval from the higher authorities (Commissioner/ Chief Commissioner) for taking additional time to dispose the application in such cases. This would ensure that there would are no laches on part of the department/ field level officers in disposing off the SVB references.

Specifically a short time-frame ought to be fixed for issuance of renewal orders with a shorter and well defined time-frame for renewal of SVB orders where there is no change in fact pattern.

Further, SVB proceedings should be relaxed or at least fast tracked with respect to goods that attract nil basic customs duty and MRP based CVD assessment.

Prescription of higher rate of depreciation
Issue: We wish to highlight that in the absence of definition of the term ?omputer and computer peripherals significant number of ITA products do not enjoy the accelerated rate of depreciation. It is important to note that all ITA products have approximately the same life cycle as ?omputers and computer peripherals

Impact: The rate of depreciation prescribed in respect of capital goods (other than computer and computer peripherals) is very low. For these products (under the prescribed depreciation for capital goods) to achieve full depreciation, it takes more than five years. This result in a host of IT products whose effective life is exhausted within a few years (on par with computers and computer peripherals) being considered for lower depreciation and consequently for higher tax reversals / payment at the stage of their de-bonding / disposal thereby enhancing costs incurred by businesses.

Recommendation: In view of the above issue, it is recommended that a definition of the term ?omputer and computer peripheralsbe inserted in the CENVAT Rules to include all ITA bound products inter alia specifically including network and testing equipments. This amendment would ensure that all ITA bound products enjoy an accelerated depreciation rate in comparison to the depreciation rate prescribed in respect of capital goods.

Introduction of Goods and Service Tax (GST) legislation may be expedited
Issue: The Government of India has been contemplating introduction of GST for some time now, as expected, the GST regime will revamp the entire indirect taxes in India and would require significant changes to be undertaken by the companies from financial, infrastructure perspective. However, without any substantial progress being made on this front by the Government, apprehending any semblance of the GST regime is far-fetched. Given the significant impact of GST on the businesses and target for interdiction of GST being April 2016, it is imperative for the Government to engage vigorously with the industry.

Impact: Lack of vigor introduction of GST on part of the Government and absence of dialogue with the industry may hamper the successful implementation of GST

Recommendation: It is recommended that Central Government should come out with the draft GST legislation at the earliest for the purpose of understanding, discussions and eliciting the views of the business and trade. Business community should be provided sufficient time to understand and study the legislation and its implications on the business and trade and to contribute with the views and suggestions. The views and suggestions made by the business and trade community can thus be suitably accommodated, clarified, taken into account at the time of introduction of formal GST legislation.

What does NASSCOM expect from the budget?
R Chandrashekhar, President, NASSCOM
The Government has been progressive and has committed to adopt technology for governance. With enabling policies and speedy implementation, we can surely realise the Digital India vision. The success of the flagship initiatives of the government – Digital India and Make in India not only offer tremendous opportunities for the innovation driven technology Industry, but its success also hinges on the sustainability and continued growth of the technology driven sector. Hence, factors that can potentially restrict growth and innovation needs to be addressed.

We recommend that the government address regulatory and tax challenges for technology start-ups and SMEs, like difficulties in access to funding for low asset based firms, investor difficulties related to regulations and taxations discouraging investors, ambiguous Software product taxation and implementation issues adding to burden.

It should also offer incentives for technology start-ups and SMEs. It should extend provisions on deduction for employment and skill development (Section 80JJAA), R&D credits, there should be  new provisions like offsetting manpower training cost, deferred tax credits for start-ups.

Interest rates on penalty for service tax, for amount under litigation, should be rationalised. Rates introduced in the last budget are punitive at 30%. Nasscom acknowledges that companies who have collected service tax but not paid to the Government should be penalised and hence a 30% interest rate maybe applicable to such defaulters. For others, where there is a dispute over legal interpretation on applicability of service tax, a nominal rate of interest maybe notified.

To encourage growth of e-commerce, taxation on digital transactions should be in the least, at par with the physical world, if not reduced to facilitate adoption and migration to technology enabled platforms. This will help Government leverage the inherent transparency and traceability of online transactions.

We also have certain suggestions towards Make in India initiative as well. In recognition of the transformative impact of IT, extend incentives to the Indian industry for adoption and implementation of IT tools for efficiency enhancement, ensuring sustainability and global competitiveness for the success of the Make in India programme.

The government could revoke exclusion of expenses towards software tools for R&D from weighted deduction under the DSIR guidelines to encourage adoption of advanced R&D. Policy revisions/ clarifications are required for expansion of the Industry. In case of ExportsForeign Tax Credit policy, drawback scheme for services, carry backward of business losses.

For the domestic business  the government must align royalty definition with international practices, clarify POPS rules, revisit amendments made in CENVAT rules, restore lower TDS rates on Fees for Technical Services, clarify Transfer pricing related issues some of which were addressed in the last budget,, but details are awaited.

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