Expectations of IT sector from Budget 2017-18



-Extend Deduction under Section 35(2AB) of the Income Tax Act to Computer Software


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Currently, weighted deduction of 200% is available for expenditure incurred on scientific research on in-house research and development facility as approved by Department of Scientific & Industrial Research. The deduction is available to a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing. There is an ambiguity whether in-house Research & Development facility for computer software is covered within the ambit of section 35(2AB) and whether the software product should be eventually owned by the company.


It should be provided explicitly in the Act that the benefits of weighted deduction under section 35(2AB) of the Act are also available to companies engaged in the manufacture of ‘computer software’. The definition of computer software for the purpose of this section should be the same as provided under Explanation 2 to section 10A of the Act.


-Allow Weighted Deduction on Skill Development Expenditure


To promote skill development in the IT sector, weighted deduction on skill development expenditure incurred by IT companies should also be made eligible for deduction under section 35CCD of the Act.


-Accelerated Depreciation on IT and Telecom Hardware Products


As per the announcement made by the Finance Bill, 2016, the highest rate of depreciation will now be restricted to 40% with effect from 1 April 2017 (i.e. from previous year 2017-18 and subsequent years). The accelerated depreciation on assets like computers (including computer software) is provided not as an incentive but considering their fast obsolescence due to rapidly changing technology. It is accordingly recommended that accelerated depreciation on computers and computer software be retained as even the current rate of 60% on computers (including computer software) is not sufficient keeping in mind the pace of technological obsolescence. Further, most IT products have approximately the same, if not shorter, life cycle as computers and computer software, however, accelerated depreciation is not allowed on them. It is recommended that the rate of depreciation in relation to computers, software and other IT products (i.e. all ITA goods) be increased.


-Parity in the Treatment of Export Turnover and Total Turnover


The term ‘total turnover’ has not been defined in the Act. The tax authorities do not provide parity in the treatment of the term ‘Export Turnover’ (‘ET’) and ‘Total Turnover’ (‘TT’) for the purpose of computation of deduction under sections 10A/10AA/10B of the Act. Hence, certain items which are excluded while computing the ET are not excluded from the TT, thereby distorting the figure of ET/TT. If an undertaking does not have domestic turnover, then its entire profits should be exempt from tax under the provisions of Section 10A/10AA/10B, as the case maybe.


However, because of the differential computation of ET and TT, the value of ET/TT is usually less than 1 and therefore, the deduction is not allowed for the entire amount of profits of such an undertaking.


It is recommended that definition of total turnover should be clearly provided in the Act and which should be in parity with the definition of export turnover (in relation to exclusion of certain items).


-Clear Guidelines on Attribution of Profits to Permanent Establishment


Many a times, a Permanent Establishment (‘PE’) of foreign enterprises is alleged by the tax authorities on account of mere procurement of orders for sale of goods or provision of services or answering sales related queries, etc. These are routine services outsourced to Indian enterprises. Provision of these services is the backbone of IT/ITeS sector in India for which they get remunerated at Arm’s Length Price (‘ALP’). Foreign investors/companies are losing interest to invest in India since there is a tendency of the tax authorities to allege that the Indian entity is a PE of the foreign entity. They also fear attribution of profits of the foreign entity to such an alleged PE. This is in-spite of the fact that Indian entity is remunerated at ALP by the foreign company and such ALP is accepted during transfer pricing audit of the Indian entity.


It is recommended that the Act should categorically provide that no further profits can be attributed to PE, if PE is remunerated on arm’s length basis.


( Source: Ficci)