Tech industry seeks fiscal support and streamlining of input tariff

To develop a strong electronics components and sub-assembly ecosystem, the tech industry has demanded fiscal support and streamlining of the input tariffs in the sector from the government which is consulting all the stakeholders before the upcoming Union Budget 2024-25.

“We propose reducing the current seven slabs to three slabs. Aligning our tariff structure with those of competing electronics manufacturing nations will boost cost competitiveness, simplify trade, and attract global value chains,” said Pankaj Mohindroo, Chairman of the India Cellular and Electronics Association (ICEA).

The industry body also recommended removing the 2.5 per cent tariff slab to enhance ease of business in the industry.

“This 2.5 per cent makes no sense. ICEA is devoted to building domestic manufacturing and has never hesitated in making stiff recommendations for promoting domestic industry. Whenever required we have asked for bold steps including short term higher tariffs,” Mohindroo added.

Nasscom, which also represents startups, also recommended enabling the direct listing in India of Indian-origin foreign-incorporated firms. An expert committee of market regulator Sebi has recommended that equity shares of companies incorporated outside India should be allowed to be listed on Indian stock exchanges. Its recommendations have not yet been implemented.

Increased focus in hi-tech manufacturing and R&D
A key budget expectation from the technology sector is to see the Rs 1 lakh crore deeptech fund for startups getting in motion, according to experts.

“Incentives to promote R&D, motivate long term patient capital, provide resources including infrastructure access and incubation support could really provide the deep tech ecosystem the necessary impetus,” said Siddharth Tipnis, Partner, Technology Sector Leader, Deloitte India.

Looking at the progress of PLI schemes, the industry is also hoping that the government might want to expand coverage in sectors like consumer electronics, computer and networking, and industrial electronics, among others.

On the cybersecurity front, the Data Security Council of India (DSCI) recommends that the government must move beyond reliance on audits and testing, and towards real-time management of security problems, for which a dedicated budget should be allocated to support or incentivize this shift.

“By allocating budgetary resources, we can empower startups developing niche capabilities in the cybersecurity space and equip our workforce with the necessary skill sets,” said Vinayak Godse, CEO, DSCI – an industry body for cybersecurity under Nasscom.

Lighter taxation environment for tech industry
The IT sector is also looking at increasing eligibility thresholds under safe harbour provisions from current levels of up to Rs 200 crore in international transactions to Rs 2,000 crore at least, according to the National Association of Software and Service Companies (Nasscom), which represents India’s $254 billion technology industry.

Safe harbour rules or conditions relieve taxpayers from obligations typically imposed under the Transfer Pricing Regulations introduced in 2001.

“A company right now can only apply for a safe harbour margin if its international transactions are up to Rs 200 crore in a year, which means a lot of entities are left out. It is not just global capability centres (GCCs) but even in the usual IT/BPM space, companies with holdings in subsidiaries where transactions between the offshore centre, which could be a subsidiary abroad, can easily surpass the Rs 200 crore limit. This means hardly any of our industry gets to participate in the safe harbour,” said Ashish Agarwal, vice-president and head of public policy at Nasscom, referring to the information technology and business process management industry.

Applicable margin rates under safe harbour should be in line with global trends, according to Nasscom. It requested a margin rate of 10 per cent for IT-enabled services (ITeS) and knowledge process outsourcing (KPO) and 12 per cent for IT services, including contract research and development (R&D).

“No other country has prescribed safe harbour margins specifically for IT-ITeS under their transfer pricing laws. Globally, countries classify software development/ITeS under the category of ‘routine services,’ which has a lower mark-up (generally around 5 per cent) on such services. Even for R&D services, a maximum margin of 10-12 per cent is applied. We have looked at the US, UK, China, Poland, the Philippines, Malaysia, Israel, among other countries. We therefore need to simplify the margin rate categories in India and provide margins which are comparable to international levels,” said Agarwal.

India’s applicable margins under safe harbour for IT-enabled services are 17-18 per cent, for KPO they are 18-24 per cent, and for contract R&D 24 per cent.

Agarwal said that issues related to transfer pricing, including advanced pricing agreements (APAs), were the technology industry’s top expectations from the Budget.

“What we are trying to do is to enable greater investment into the IT sector. We are looking at measures which could benefit the industry from an export perspective because in the overall environment there is a slowdown in terms of growth. So when you look at the next few years, I think just from a tax competitiveness point of view, it is essential to see that our taxes are globally competitive. In that scenario, one of the big things is the transfer pricing,” he said.

India should look at an advanced pricing timeframe similar to China’s, which currently falls around six months.

“This needs work from various angles. Also, new applications for advanced pricing agreements could be a renewal of the earlier advanced pricing agreements where not much has changed and the facts are similar. So you could create a fast track for the renewal,” said Agarwal. Business Standard