Budget impact on IT industry: EY

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Measures to resolve transfer pricing disputes

The IT industry, which is currently facing protracted transfer pricing related litigation with the tax department, has been, since long, demanding an alternative mechanism to fast track and resolve transfer pricing disputes. Recognising the hardship faced by the industry on this front, the FM has introduced an alternative dispute resolution mechanism to address transfer pricing matters.  The Budget provides for the constitution of a new Dispute Resolution Panel constituting of senior revenue officials, which may be approached by a tax payer before the tax officer actually carries out a transfer pricing adjustment.

In addition to the above, the Government has decided to formulate 'safe harbour' rules to eliminate uncertainty associated with transfer pricing disputes.  These rules are expected to provide a minimum profit margin that shall be acceptable to the tax authorities in respect of transfer pricing arrangements of a tax payer with its related enterprises.

The IT industry has welcomed both the above proposals which should reduce transfer pricing related litigation.

Indirect tax related proposals

The Finance Minister has introduced simplified refund procedures in the Budget which are applicable to exporters of goods. There is an urgent need to introduce similar procedures to simplify administration of refunds to exporters of services as well as SEZ units.

The anomaly of double taxation on software licensing transactions has been rectified in this Budget by granting an excise duty exemption on the value representing transfer of right to use packaged software or canned software. However, clarity on the method to be adopted for determining the value related to transfer of right to use such software is required.

Conclusion

The FM has attempted to provide relief to the IT industry through his budget proposals related to tax holidays and dispute resolutions. However, in the absence of long-term policy reforms, it needs to be seen whether these proposals would provide the much needed stimulus for growth as well as fresh investment in the IT industry.

Kartik Rao is a senior tax professional with Ernst & Young, India.