IT industry needs Govt focus to resolve issues impacting the sector

By Tapati Ghose, Vijai Jayaram, Rashmi Somasekhara and Rohit Lal

The Information Technology (IT) sector plays a vital role in the growth of the Indian economy. India is one of the leading sourcing destinations in the world for technology and business process services, accounting for approximately 55 per cent market share of the global services sourcing business in 2017-18.

Indian IT’s core competencies and strengths have attracted significant investments from major countries. In the recent years, Indian technology vendors have also evolved their core solution offerings from traditional application and infrastructure management services to emerging technologies such as blockchain, artificial intelligence, automation, etc. and have invested in innovation hubs and research & development centres to create differentiated offerings.

The government has identified IT as one of 12 champion service sectors for which an action plan is being developed. Also, the government has set up a Rs 5,000 crore (US$ 745.82 million) fund for realising the potential of these champion service sectors, not to mention the significant investments emanating from initiatives such as digital India and smart cities.

While the initiatives taken by the government on the policy front have supported the growth of the industry, there is a need for a parallel focus on resolving some of the issues impacting the sector.

Here are some of the key challenges that the IT sector is currently grappling with:

  • Phasing out of income tax holiday benefits for SEZ units could displace India as the favourite IT destination in the world, as it is being challenged by nations like China, Philippines, Indonesia, etc, which are having a low-cost advantage, as well as new age skill sets.
  • Though the government has introduced specific regulations, government funding and tax benefits for encouraging startups, there is a lack of clarity on the criteria and approval requirements that need to be satisfied for availing such benefits. Further, startups have been continually facing scrutiny from the tax authorities in relation to angel tax issues, impeding their business.
  • From a Base Erosion and Profit Shifting (BEPS) perspective, the introduction of the concept of Significant Economic Presence (SEP), to tax the digital economy, has imposed challenges before the industry, as there is uncertainty around the nature/extent of criteria/thresholds that would be introduced.
  • Treatment of Advertising and Marketing (AMP) expenditure incurred by companies in the e-commerce industry, as brand building/capital in nature by the tax authorities, even though the benefits from such expenses are temporary and short-lived.
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Significant litigation in relation to comparables and arm’s length price/margins in transfer pricing assessments.

On the Goods and Service Tax (GST) front, the industry has been adversely impacted and faced with ambiguity due to divergent advance rulings by tax authorities. For instance, a recent advance ruling held that back-office support services provided by an Indian company to its foreign counterpart do not qualify as exports. Levy of GST on such services would certainly impact India’s competitiveness in the global market and be a threat to India’s leading position in the IT/ITeS sector.

Delay in granting refund of accumulated GST credits continues to pose a working capital challenge to the industry, despite government’s initiatives such as special refund drives.

(Tapati Ghose is Partner, Deloitte India; Vijai Jayaram is Director with Deloitte Haskins & Sells LLP; Rashmi Somasekhara is Director with Deloitte Haskins & Sells LLP; and Rohit Lal is Deputy Manager with Deloitte Haskins & Sells LLP)



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