It has been reported that The tectonic shift caused by the COVID-19 pandemic forced us to reimagine every possible facet of our daily lives, healthcare systems and business models. At the epicentre of this watershed moment was the unprecedented adoption of technology, propelling a ‘never seen before’ cultural transformation, which otherwise was a distant future to experience.
Closer home, India’s technology sector, known for its cutting-edge innovation capabilities and replicable success globally, has been dutifully fighting the pandemic without letting businesses take a hit. Apart from nurturing collaboration amongst individuals, enterprises and institutions, the sector, has for India, fast-tracked digitalisation beyond its national shores, for the good. The sector’s extensive contribution to the economy in good and trying times like these has been unparalleled, the report said.
With the budget coming at the backdrop of recovery, notwithstanding the Omicron threat, the sector is looking for booster shots, especially around tax laws to help drive overall investments and ease of operability.
Simplifying the ‘Hybrid’ Mode
Work-from-home has become one of the biggest transformation stories of this century. However, from a tax perspective, businesses need clarity on eligibility of income-tax holiday in respect of services rendered remotely by employees of Special Economic Zone (SEZ) units. A step in this direction would go a long way towards easing uncertainty and avoiding potential litigation.
Government should also consider relaxing provisions regarding the utilisation of SEZ reserves, which is currently restricted to acquisition of plant and machinery. Since IT / ITeS companies, which make up a dominant portion of the approved SEZ units, do not have significant capex requirements, they are unable to fully utilise SEZ reserve and lose out on tax holiday benefits.
Fueling e-Eommerce Growth
In 2020, the government introduced a new provision imposing withholding tax obligations on e-commerce operators. While certain aspects regarding the provision have been clarified by the income-tax department, ambiguities remain such as applicability of the provision on platforms merely listing products of other online sellers or e-commerce operators.
Further, the provision requires e-commerce operators to withhold tax even if payments are not routed through the e-commerce operator, which is extremely onerous to comply with. This sector has been a force multiplier in the current environment; therefore, it is imperative to clarify the unaddressed issues and ease out the compliance burden.
Aligning with global digital tax trends
The Equalisation Levy (EL) provisions were expanded effective April 1, 2020, to include a 2 percent levy on online transactions involving sale of goods or provision of services by non-residents in India.
While certain clarificatory amendments were introduced last year, various interpretational issues around the scope and coverage of EL provisions still subsist. The recent signing of the OECD statement and the transitional approach agreed with the US with respect to credit of EL against OECD Pillar One liability provide a strong indication of its withdrawal, though unlikely in this year’s budget.
Having said that, clarifications on the open interpretational issues would provide certainty to taxpayers and ensure better compliance. Considering that there could be possible disputes around interpretational aspects, there is a need for the introduction of a grievance redressal mechanism to address such issues.
Addressing the Cross-Border Mobility Issues
One of the many disruptions brought by the pandemic led to several business travellers of foreign companies being stranded due to air restrictions imposed. This led to concerns regarding trigger of taxable presence in India of the foreign employer (i.e., Permanent Establishment and Place of Effective Management risks), as well as the taxability of the individual.
The technology sector, in particular, had to bear the brunt of cross-border mobility restrictions. A clarification from the government in this regard, exempting such companies from any tax liability either by way of Permanent Establishment or tax residence will be much appreciated.
On the individual front, relief was provided for FY 2019-20 and general guidelines were issued for subsequent financial years for alleviation of double taxation of salary income under the tax treaty. That being said, an explicit relaxation under Indian tax law would be welcomed as the pandemic continues to impact travel.
The upper revenue threshold for Safe Harbour eligibility for transfer pricing for IT/ITeS transactions is currently Rs 200 crore. Companies with transactions exceeding the prescribed threshold are ineligible to avail of Safe Harbour by conceding a higher margin. To obtain tax certainty, such companies are only left with the option of obtaining an Advance Pricing Agreement (APA), which is a time-consuming process.
Technology Sector
The industry is thus looking for an increase in revenue threshold for Safe Harbour eligibility, to improve India’s attractiveness as an IT/ITeS outsourcing destination and reduce litigation.
In addition, companies are finding it difficult to maintain the prescribed Safe Harbour margins in the current operating dynamic. It is therefore imperative to revisit the margins and provide requisite relief in light of the impact of COVID-19. Some relief in this direction is expected to be welcomed with open arms, considering the importance of this sector to the exchequer.
With the FM getting into the swing of Budget 2022, at the backdrop of several promises to keep, the technology sector will wait with bated breath for its rightful share. While the government has shown unwavering commitment and support towards digitization, providing the right set of impetus to this sector will be critical to accelerate India’s recovery story and fulfill the $1 trillion digital economy ambition. (CNBCTV18)