Government issues circulars on IT development centres

The government has notified certain recommendations that the Rangachary Committee has proposed for the IT sector. The circular issued by the government provide clarity on taxation matters with regard to research and development activities in the IT sector. The government has now decided to adopt some more recommendations, reports CNBC-TV18's Aakansha Sethi.

The Prime Minister had set up a committee headed by Dr Rangachary to define norms for development centres. Several multi-national companies (MNC) have development centres in India because of the availability of low cost and skilled labour. According to the tax department, these development centres often have low profits attributed to them. There has always been confusion over how the transfer pricing norms are applied to them. The Rangachary committee will define what a development centre is and what will be the profit applicable to such a development centre. So, two circulars have been issued. The first one is on the definition of development centres and what kind of risks the development centres have to assume including whether it creates property rights, or if it is a developing software. The second circular is on how much of the profit will be attributed to the development centre and how much will be attributed to the parent company, which could be in another country. This will be an important piece of legislation for IT companies especially several of whom have development centres in the country. The government will soon issue a circular to provide clarity on taxation matters with regard to research and development activities in the IT sector.