New Delhi: In her Union Budget speech, Union Finance Minister Nirmala Sitharaman announced reforms for supporting the Information Technology sector as ‘India’s growth engine’.
“India is a global leader in software development services, IT enabled services, knowledge process outsourcing services and contract R&D services relating to software development. These business segments are quite inter-connected with each other,” Sitharaman said Sunday.
She then proposed to club all these services under a single category of Information Technology Services, with a common safe harbour margin of 15.5 percent applicable to all. She has also proposed to increase the threshold for availing safe harbour for IT services, from Rs 300 crore to Rs 2,000 crore.
A safe harbour is the range within which the tax authorities shall accept the transfer price declared by the taxpayer in transactions with its related parties. This is governed by the safe harbour rules framed by the Central Board of Direct Taxes.
The 15.5 percent margin is the new profit margin declared by the government. Essentially, the tax authorities would not question the transfer prices declared by a business, if it avails of the safe harbour treatment and has at least 15.5 percent profit margins.
Supreme Court advocate on record, Deepak Joshi explained that the concept of safe harbour was introduced in 2013 to reduce prolonged disputes and provide certainty to global investors.
“The benefits of the same were not widely availed by the IT sector due to its restricted applicability in terms of turnover limit of Rs 300 crore. It also prescribed a higher taxable mark up upwards of 17 percent margin,” he said.
However, he asserted that with the budget proposals, as and when the rules are amended, both these bottlenecks will get resolved.
“The eligibility criteria has been broadened to a turnover cap of Rs 2,000 crore and the safe harbour taxable margin has been reduced to 15.5 percent. These proposals benefit the Global Capability Centres and IT sector in particular which provide services to their overseas related entities,” he told ThePrint.
In her speech, Sitharaman also said that safe harbour for IT services shall be approved by an automated rule-driven process without any need for a tax officer to examine and accept the application. Once applied by an IT Services company, the same safe harbour can be continued for a period of five years at a stretch at its choice, she added.
Industry welcomes move
National Association of Software and Service Companies, the apex body for technology industry in India, welcomed the move.
“We thank the FM for enhancing the Safe Harbour turnover threshold for IT services from Rs 300 crore to Rs 2,000 crore, along with introducing a uniform 15.5 percent margin. This has been a key ask from Nasscom, and its acceptance will provide much‑needed clarity, predictability and competitiveness for India’s IT services sector,” the NASSCOM said.
Sitharaman also announced a tax holiday up to 2047 to any foreign company who provides services to any part of the world outside India by procuring data centre services in India. A tax holiday is a temporary reduction or exemption from taxes to encourage investment.
“It is also proposed to provide a safe harbour of 15 percent to the resident entity providing data centre services to a related foreign company (who is providing cloud services to any part of the world outside India),” she added.
Commenting on this proposal, Joshi told ThePrint, “This will incentivise foreign investment into data centre infrastructure in India, specifically in an AI-led economy.”
(Edited by Tony Rai)
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