India govt owes IT firms millions in tax refunds

The Indian government owes at least INR 30 billion (US$547.6 million) in service tax refunds to IT companies, with the money having been stuck with tax authorities for at least 3 years for most companies.

For other companies, the delay has been up to 9 years, the Economic Times reported Wednesday. Major IT companies such as Tata Consultancy Services, Infosys, Wipro and HCL Technologies have been waiting for some INR 10 billion (US$182.5 million) in refunds, it added. They declined to comment, according to the report.

The Indian newspaper did not state its source or how it came to the figures. It added that the Department of Service Tax did not respond to its calls or e-mails.

The report cited industry observers as saying the government has been cracking down on tax evasion, while being unwilling to return the money it owes to IT companies. They believe that amount of refunds still pending with the service tax department for more than 3 to 4 years would be at least INR 50 billion (US$912.6 million), with at least 60 percent belonging to the IT sector.

Pramod Banthia, executive director at PricewaterhouseCoopers, said: "A majority of [refund] requests are either rejected by the department on grounds of inadequate paperwork, ineligibility or are simply lying on some table waiting for approval."

Export revenues from IT companies are entitled to service tax exemption due to government incentives to boost export. Companies still need to pay the tax and then claim a refund. However, the lack of clear legal provisions relating to the IT services sector has led to many rejections and litigation that could have been prevented, according to the Economic Times report.

T.V. Mohandas Pai, who was CFO at Infosys from 1994 to 2006, said: "In the past, I have dealt with almost 40 countries, given the vast operation of the business, but never came across a case where the company is denied a refund which it is legally entitled to."

Typically, IT companies pay 4 to 5 percent of their total revenue on service tax annually. The pending refunds sit on the companies' account books as receivables, and impact the working capital of the company, the report said.

It also said India's software industry body Nasscom (National Association of Software and Services Companies) has been working with the government on this issue, but to not much progress.

"Time and again, we have talked to the government representatives but issues of service tax refund still exist and are creating a burden for the industry," said Bishakha Bhattacharya, director for government relations at Nasscom. "Tax authorities reject the entire application consisting of thousands of forms if they spot even one discrepancy," he added.

Last year, the commissionerate of service tax in New Delhi assured companies of faster resolution, which raised hopes for quicker refunds. The department at the time said claims pending for more than a year as of June 30, 2012 would be resolved by the end of 2012, while future claims would not remain pending for more than three months.