India to ease tax rules for IT sector

Amid a weakening export industry, India hopes to bring more certainty to its tax regime over the IT sector to attract more investments from MNCS, especially in software development.

The Indian government is set to relax tax rules for the country's IT sector to make it a more attractive place for software development for multinational corporations (MNCs).

Citing a senior government official, The Economic Times reported Monday that a high-level panel recommended favorable tax treatment and a stable tax regime for the software industry, amid a worsening outlook for India's export industry.

The panel was appointed by Prime Minister Manmohan Singh and chaired by Central Board of Direct Taxes (CBDT) Chairman, N. Rangachary.

Som Mittal, president of trade association Nasscom (National Association of Software and Services Companies), said certainty and clarity in the tax regime and rules will encourage MNCs to bring more work to India.

He added since nearly 35 percent of India's export revenues came from MNCs and their captive units in India, these MNCs need to be encouraged to set up their development centers in India, rather than the Philippines or China. A captive unit is an offshore business unit of a company that functions as its own entity.

Nasscom has also said transfer pricing rules--which are meant to prevent MNCs from mispricing their products in order to move profits out of India--are too stringent and hurt the profitability of the IT sector.

So, the government will now fix a markup, or an acceptable level of deviation of market price called "safe harbor", which the panel will finalize by this December, Economic Times reported. After that, tax authorities will accept transfer prices declared by companies, which will bring more certainty in tax dues and also reduce disputes.

According to V. Balakrishnan, CFO of Infosys, tax issues have been a big distraction for the software industry as it tries to grow in a challenging global economic environment.

Another major complaint from Indian software companies has to do with the tax treatment of profits earned from on-site activities, which refers to work these companies do at their clients' sites, the report said. Tax authorities have said onsite activities are not considered exports, and therefore do not qualify for tax exemption.

The Economic Times said the panel held extensive consultations with the software players before finalizing the first of its three reports of tax recommendations.

The panel is one of the various attempts by India to improve flagging investment in the country, the article added.