JULY 04, 2009

Keep up promise of complete exemption of SEZ from service tax

By Kavita Kulshreshtha

Corporate Taxation:

++ MAT to be withdrawn for STPI units enjoying a tax holiday since the purpose of providing a tax holiday is defeated if MAT is levied.

++ Due to extension of tax holiday, recession faced by the IT/ITES industry and resultant forex losses, it seems unlikely that the IT/ITES industry would fall into the regular tax zone in the immediate future. Hence the period of set off of MAT credit to be increased beyond 7 years.

++ Extension oftax holiday u/s 10A beyond 2010 for software development units/BPO and Call Centre units for another 5 years

++ Though section 10A(STPI)/10AA(SEZ) provide 100% income-tax holiday, the tax benefit gets mitigated due to anomalies/non clarity in the computation provisions and has led to litigations across IT industry at various levels. (Amendments required – terms technical services/total turnover need to be defined in section 10A, term total turnover for 10AA (SEZ) should be total turnover of the SEZ unit).

++ Units set-up in SEZ, enjoy direct tax benefits like exemption from MAT and Dividend Distribution Tax, no restriction on carry forward and set off of losses; no time limit in realization of export proceeds etc. such benefits need to be extended to STPI units also.

++ Dividend Distribution Tax of 16.995% is very high and is in addition to the corporate tax of 33.99%. The same needs to be removed.

++ To do away with the 10% surcharge on Corporate Tax.

++ Abolition of FBT on ESOP and to continue with the earlier scheme of taxation on ESOPs or in the alternative allow employees to set off the FBT paid to the employer against taxes payable on total income. In view of the widely fluctuating trend in the worldwide stock prices, the existing valuation methodology of considering market value on the date of vesting results in a payout by employee on exercise of options instead of a gain. The same needs to be revisited.

++ FBT needs to be revisited/clarity provided for business related expenses since such expenses do not result in Fringe Benefits to the employees such as expenses on provision of hospitality, gifts to customers, hotel expenses incurred for customers, sales promotion expenses etc. FBT on travel needs to be removed for exporters as the same acts as a disincentive for them to travel to explore possibilities of new business.

++ Introduction of advance pricing arrangements for transfer pricing will resolve actual or potential transfer pricing disputes in a principled, cooperative manner, as an alternative to the traditional litigation process.

Indirect Taxation:

++ Keep up the promise of complete exemption of service tax on SEZ units since the refund mechanism in lieu of blanket exemption involves lengthy procedures, additional administrative costs, cash flow issues and most importantly the time lag in obtaining the refund. This is evident from the crores of service tax refund applications lying with the department for STPs.

++ Recently Delhi High Court has held that renting of immovable property would not by itself constitute a taxable service and hence exempt from service tax. The service tax rules to be amended to exempt renting of property from service tax.

++ Last year all information technology services were brought under the service tax net. These services also included purchase of software licenses which are already taxable as a product under VAT law and as a result purchase of software licenses are getting doubly taxed. This anomaly needs to be removed so as to tax all software licenses only under one law.

++ Clarity on rules for refund of service tax paid on input services for export of IT and ITES for STPs. All such refund applications are under litigation at one level or other.

++ VAT and Service Tax to be merged into GST and a single rate for indirect taxes to be implemented.

Personal taxation

++ Considering the economic downturn and the need for savings and investments the exemption u/s 80C of Rs. 1 lac need to be increased resulting in tax benefits to individuals on the other hand.

++ Reinstatement of standard deduction and increase the basic exemption limits.