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Pre-Budget expectations of the IT and BPO industry

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DQW Bureau
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face="Times New Roman, serif">Contributed
by
style="font-weight: normal;">Kartik
Rao, Associate Director-Tax & Regulatory Services, Ernst &
Young

The
Indian IT and BPO industry, which is just emerging from the economic
downturn is expected to deliver an impressive growth of approximately
19 percent during FY '11. While the industry is cautiously
optimistic about its growth prospects, the macro-economic conditions
in the US and European markets, wage inflation and President Obama's
protectionist policies have forced the industry to present a
conservative outlook.

face="Times New Roman, serif">In
the backdrop of this challenging economic scenario, the Finance
Minister will be presenting the Government's proposals in Budget
2011. On the direct tax front, the industry would hope for an
extension of the tax
holiday scheme for Software Technology Parks (STP), which is
otherwise set to expire on March 31, 2011, by at least another year
till March 31, 2012. The increase in the rate of Minimum Alternative
Tax (MAT) from 15 percent to 18 percent in Budget 2010 has not gone
down well with the industry and a roll back of the MAT rate to 15
percent would certainly be viewed positively.

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face="Times New Roman, serif">Transfer
pricing has emerged to be one of the most litigious issues for the
industry and there is an urgent need to face="Times New Roman, serif">operationalize
the safe harbor provisions, which
were
first announced in Budget 2009.
face="Times New Roman, serif">The
Government should also consider the implementation of an Advance
Pricing Arrangement (APA) framework in this year's budget. These
measures would definitely help reduce transfer pricing related
litigation. On the
indirect tax front, there is an urgent need to address the issue
around the dual levy of service tax and VAT on standard or packaged
software. As a result of such conflicts, the effective indirect tax
burden on software has gone as high as 14-15 percent in recent years.
The applicability of service tax exemption when services are
provided to units and developers in SEZs has also been a bone of
contention in view of certain interpretation-related issues. In
order to resolve this, it may be more prudent for the Government to
equate supplies to SEZ as akin to exports outside India.

face="Times New Roman, serif">The
Government should also focus on improving the procedure and
administration around refund of input tax credits (CENVAT credits)
relatable to services exported outside India. This would help unlock
the significant quantum of pending refunds due to service exporters. face="Times New Roman, serif">The industry is hoping
that the Government would deliver a growth-oriented tax policy
framework in Budget 2011 which would help it emerge unscathed from
this challenging economic scenario.

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