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Budget 2021 | No clarity on SEZ rules for WFH, but IT firms could gain from digital projects

The Union Budget 2021 earmarked Rs 3,768 crore for first ever digital census. Revamp of Ministry of Corporate Affairs website leveraging new-age technologies is planned in 2021-22.

February 01, 2021 / 06:50 PM IST
Representative image (PC- MoneyControl.Com)

Representative image (PC- MoneyControl.Com)

 
 
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Indian IT sector will gain from the Union Budget's proposal for the first-ever digital census and upgrading of the Ministry of Corporate Affairs using new-age technologies. However, this gain will be incremental and likely to benefit the tier -1 IT companies more, say experts.

The Union Budget 2021 earmarked Rs 3,768 crore for the first-ever digital census. Finance Minister Nirmala Sitharaman during her Budget speech said, “During the coming fiscal 2021-22, we will be launching data analytics, artificial intelligence, and machine learning-driven MCA21 Version 3.0.”

“This Version 3.0 will have additional modules for e-scrutiny, e-Adjudication, e-Consultation, and Compliance Management,” she added.

The current version of the Ministry of Corporate affairs, MCA21 website is maintained by the IT major Infosys. Revamping of the site leveraging new-age technologies will mean business for IT companies in the country.

Ashish Chaturvedi, Principal Analyst at ISG, said, “India majors like TCS and Infosys can expect to further increase their domestic revenues as the government will be looking for technology partners around multiple department modernization projects.”

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Industry analysts also pointed out that this will help the IT majors develop capability in the public sector industry, which is not a big segment for IT firms currently, and take it to larger markets.  In addition, Rs 3,000 crore allotted for skilling engineering graduates will create the much-needed talent landscape in digital technologies.

IT executives also pointed out that Rs 50,000 crore funding for National Research Foundation will give a boost to the innovation quotient. CP Gurnani, CEO, Tech Mahindra, said, “The focus on innovation and R&D (Research & Development) as an important pillar is a critical step in increasing the export income of Indian IT sector.”

But...

There is not much else for the IT sector that employs over 40 lakh people and generates $190.5 billion in revenues.

Vishal Malhotra, Tax Partner and Telecom Tax Leader, Ernst & Young India, pointed out that while the digital projects might create incremental revenue for the IT firms, it is the tier I companies that will benefit.

“In my experience working with the government, it is the large tier 1 companies that are given large projects. They don’t give the modules to smaller players,” he said. Even if the larger players win these projects, the projects are not large. “Also at the end of the day, these are government projects. They must be adding to the top line but not very high margin,” Malhotra added.

Special Economic Zones (SEZ) and tax benefits

One of the key things the industry was waiting for was clarity on SEZ rules. Around 60 percent of the operational SEZs in India relate to IT/ITeS and hence these are important growth drivers for IT firms.

At the back of COVID-19, most IT firms are now looking at hybrid working model with some portion of the tech workers working from home permanently. For instance, TCS has said that by 2025, 75 percent of its over 4.5 lakh workforce will work from home permanently.

In such instances, there is uncertainty on what is the impact on tax holidays these companies gained in SEZ units. “That is a big grey area right now,” Malhotra pointed out.

The Department of Telecom in November 2020 relaxed other service provider (OSP) license norms so that IT-BPM companies can enable WFH or work from anywhere for the tech workforce.

Now, if the companies are not working out of special economic zones units, can they still claim tax holidays? Can they be subjected to litigation if they do?

Right now there is no answer. “We were hoping that there will be some clarification. Since WFH is not a short term phenomenon,” Malhotra explained.

The IT industry body NASSCOM in a statement said, “We look forward for the government to provide clarity on providing a framework in direct and indirect taxes for the industry to adopt WFH/remote working on a long-term basis. Secondly, we require WFH to be enabled in SEZs on a long-term basis. Since this requires movement of duty-free goods like laptops outside the SEZs, the Finance Ministry should provide the requisite clarifications under Customs and GST.”
Swathi Moorthy
first published: Feb 1, 2021 06:48 pm

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