Call Center Outsourcing Services

At a time when the Government of India is striving hard to balance its books, it may seem blasphemous to make out a case for an extended tax holiday. As it is there is a strong argument – very well reasoned and appropriate for our times – to progressively dismantle the complex web of exemptions and pave the way for a larger tax base but with moderate marginal rates of tax.

The proponents of this school of thought frown at the continued tax exemption given to the Indian software industry, though the current dispensation will run out in 2009. But surely there is still the need for a closer look at some obvious aberrations. The issue here is one of internal consistency especially since the current scheme under Section 10A provides for an exemption from income tax for a period of 10 years from the commencement of business in an approved software undertaking or 31 March, 2009 whichever is earlier. Notwithstanding such a stated position, the department seems to be taking a view that is different in certain circumstances. For example, where the new software undertakings have been set up under an earlier STP license, the tax holiday period in some cases have been held to cease at the end of the expiry of 10 years from the date of the original license, even though such software undertakings have not completed their ten-year run. Our belief is that this is not in the spirit of Section 10A and is an unintended consequence. If we set the context to what was intended by the legislature, which is undeniably giving the IT Sector the fiscal relief till 2009, a mere technical shortcoming cannot and should not cause the denial of such an intended benefit. Apart from the above technical issue which can get clarified very easily, there are other opportunities to make it easier for tax administration and facilitate efficiencies through restructuring. Once such opportunity is available in Section 72A as it stands on the statute book today.

While the tax credits for carried forward losses of companies taken over through a scheme of amalgamation has been envisaged under Section 72A, it seems odd that BPO/ITES units are excluded in the list of eligible undertaking. It is more of a drafting oversight I think. The authorities are well aware that there has been a mushrooming of several small size BPO ventures in the heady days of year 2000, which are today faced with lack of traction and have become attractive candidates for M&A opportunities. It would be in the larger interest of both the ITES industry and CBDT if Section 72A is amended to provide for the necessary tax relief becoming available with respect to an amalgamating BPO entity. Allow transfer pricing regime to stabilise There is an urgent need to facilitate the creation of an extensive database required to benchmark the arm’s length pricing across industries. Both the Assessee and the department are at a disadvantage for want of any robust database which will give rise to some vexations litigation. The present safe harbour limit of ± 5% is very marginal, keeping in mind the evolutionary stage of the Transfer Pricing legislation in India. It is strongly recommended that the said limit should be increased or aligned to international level of about ± 15%. The current provision stipulates a penalty of 2% on the value of the International Transaction which by all means is very stringent and harsh given that all the double taxation avoidance agreements contain adequate provisions to check possible abuse through related treaties. Further, such penalties are unwarranted at this nascent stage of Transfer Pricing legislation which was intended to be a tool for anti-avoidance.

While the tax credits for carried forward losses of companies taken over through a scheme of amalgamation has been envisaged under Section 72A, it seems odd that BPO/ITES units are excluded in the list of eligible undertaking. It is more of a drafting oversight I think. The authorities are well aware that there has been a mushrooming of several small size BPO ventures in the heady days of year 2000, which are today faced with lack of traction and have become attractive candidates for M&A opportunities. It would be in the larger interest of both the ITES industry and CBDT if Section 72A is amended to provide for the necessary tax relief becoming available with respect to an amalgamating BPO entity. Allow transfer pricing regime to stabilise There is an urgent need to facilitate the creation of an extensive database required to benchmark the arm’s length pricing across industries. Both the Assessee and the department are at a disadvantage for want of any robust database which will give rise to some vexations litigation. The present safe harbour limit of ± 5% is very marginal, keeping in mind the evolutionary stage of the Transfer Pricing legislation in India. It is strongly recommended that the said limit should be increased or aligned to international level of about ± 15%. The current provision stipulates a penalty of 2% on the value of the International Transaction which by all means is very stringent and harsh given that all the double taxation avoidance agreements contain adequate provisions to check possible abuse through related treaties. Further, such penalties are unwarranted at this nascent stage of Transfer Pricing legislation which was intended to be a tool for anti-avoidance.

By: Call Centers India

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