Budget 2023: NASSCOM moots changes to ensure ease of doing business for IT/ITeS industry

Ahead of the 2023 Union Budget, industry body National Association of Software and Service Companies (NASSCOM) has made three key recommendations to aid the Information Technology and IT enabled Services (ITeS) industries in ease of doing business. They pertain to the per diem allowance threshold, safe harbour rules and advance pricing agreements.

Per diem allowance threshold

This allowance is what employees are paid by employers for each day that they spend outside their work location, on work trips and other office-related work. As things stand, this allowance is not taxable if it is spent in its entirety by the employee, but is taxable if there is an unspent amount.

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NASSCOM’s recommendation is that a monetary threshold must be given for per diem allowance for daily expenses, and that supporting documentation only be required when the amount spent by the employee is more than the prescribed threshold.

Also Read: NASSCOM seeks tax sops to incentivise funding, employment for startups

Stating its rationale, the industry lobby said employees are often required to travel both within India and overseas on work, and it is common practice for the per diem allowance to be given to employees at such times.

“Taxability of such allowances is subject to documentation, which often can cause hardship to the companies. This is, for want of adequacy or interpretation of its appropriateness or consequent to being in a foreign language, inability to read or comprehend,” NASSCOM’s recommendations said.

In addition, it said in the event that the allowance becomes taxable, it creates an additional compliance burden on the employer to evaluate whether the amount provided by the employer was incurred in expenses by the employer.

NASSCOM stressed that this increases administrative overheads, adding that no documentation is required for per diem allowances up to a specified limit in countries such as Singapore and America.

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“It also increases the admin overhead of collecting and maintaining records of many small expenses incurred by employees on official travel. For companies in IT/ITeS industry (sic) with significant foreign travel, this can be a huge operating overhead,” the rationale read.

Elaborating that this would promote the ease of doing business, the industry body said such a move will ensure “the employers and the employees are not harassed for want of documentation and the needed benefit is extended”. Additionally, it would save the department and industry “hundreds of crores in management time”, it emphasised.

Safe Harbour Rules

Transfer pricing is used for goods and services that are exchanged between a parent entity and its offshore entities. Safe harbour rules (SHR) are used as a dispute resolution mechanism for transfer pricing issues. Under this, a safe harbour reduces liability as long as certain conditions are met.

Safe harbour margins have been notified only for companies with a turnover of up to Rs 200 crore, and NASSCOM, in its recommendations, said that only a few companies can opt for it, and the threshold should therefore be increased to companies with a turnover of Rs 1,000 crore.

It has sought to have SHR margins, currently between 17 and 24 percent, at a rate not higher than 15 percent.

Existing safe harbour rules also make a distinction between software development and R&D in software development, which NASSCOM says should be done away with as “it has outlived its utility with ongoing advances in technology”.

“This shall help in reducing litigation and improve cost competitiveness of India, thereby making India an attractive destination for multi-national companies to set up global capability centre (sic),” NASSCOM said.

Advance pricing agreements

Advance Pricing Agreements are used to resolve transfer pricing issues before a transaction takes place. In its recommendations, NASSCOM suggested that a fixed time limit be prescribed for the conclusion of APAs, and noted that it takes at least four years to conclude an APA.

“During this period, taxpayers are simultaneously undergoing regular transfer pricing audits leading to multiple audits for the taxpayers, which may not be required during the APA period,” NASSCOM said.

The industry body said that delays in concluding APAs creates uncertainty for taxpayers and impacts the ease of doing business.

“Further, taxpayers also bear the burden of interest on differential tax payment for past years, besides secondary adjustments. Hence, there is a need to fast track conclusions of unliteral (sic; unilateral) APAs,” NASSCOM said.

In addition, it suggested that the government allow for the suspension of audits for years that are expected to be covered by the APA process. It also asked for the number of APA teams deployed by the government to be expanded to reduce the backlog of cases.

NASSCOM asked the government to consider a fast-track mechanism for APA applications, “covering international transactions such as loans, corporate guarantee, intra group service charges etc. or for IT/ ITeS companies having cost-plus remuneration mechanism.” It noted that these transactions and sectors usually have almost standardised APA resolutions.

A fast-track mechanism, NASSCOM said, would unclog the existing APA pipeline as IT/ITeS applications for unilateral APAs constitute an estimated 35 percent of the applications.

“Once the administration is relieved of routine IT/ITeS cases, it can concentrate on the complex cases. This will reduce the time taken to conclude unilateral APAs significantly,” it said.