Union Budget 2021: Govt should rationalise safe harbour margins, lower interest rates on loans to boost ITeS, KPO, software development

Representational Image. Wikimedia Commons

The year 2020 will long be remembered and analysed for one event, the COVID-19 pandemic which has changed the way we live, work and use technology. This has underscored a new urgency for digital connectivity and innovation, ushering in an era for the technology sector that may last well beyond the pandemic.

COVID-19 has disrupted the way in which IT companies work, with a significant workforce working from home during the pandemic. Digitisation of operations, creation of digital revenue streams, seamless customer experience, and next-generation workforce models are some of the enablers of digital acceleration that the pandemic has triggered. Against this, challenges and threats related to cybersecurity and privacy of data have the potential to become major impediments for the growth of the technology sector.

The government on its part has played a critical role in augmenting the reach of IT services across India in various areas such as digital payments, infrastructure support and digital governance. Timely interventions by way of relaxations for remote working, extending the sunset date for SEZ units, the extension of time for the realisation of forex receivables, setting up of a startup fund for meeting the funding needs of fresh startups are some of the measures that augured really well for the industry.

In the ensuing Budget, from an overall policy perspective, the industry is expecting business-critical and bold policy interventions to propel digital adoption across multiple industries, better internet infrastructure and robust data protection regime. To achieve a competitive taxation framework that is a prerequisite to attract new investments in the sector, the government could consider extending the concessional tax rate of 15 percent to new SEZ units which generate incremental employment.

The industry will also welcome clarity with respect to tax-deductibility of specific COVID-related expenses
incurred for facilitating the remote working of employees.

Given that many foreign nationals were stranded in India due to travel restrictions, in line with the OCED
recommendations, the government could consider carving out exceptions from PE exposure on that count. The condition relating to utilisation of SEZ Reinvestment Reserve for the purpose of acquiring plant and machinery can further be expanded to also meet the working capital requirements of the SEZ unit, owing to liquidity crunch caused by COVID disruption.

To provide tax holiday to startups in a true sense, the government can consider exempting DPIIT recognised startups from MAT liability and extending the period for carrying forward of losses.

Owing to the global economic downturn caused by COVID-19 , it seems even more compelling for the government to rationalise the safe harbour margins as well as lower the interest rates on loans to ensure that India retains its global attractiveness in the ITeS/KPO/software development and contract R&D space.

While the Indian Advance Pricing Agreement (APA) programme has been quite successful, the government may consider increasing the workforce in the APA team and introducing provisions which make APAs time-bound, which will help in garnering more participation in the program by IT/ ITeS companies.

Currently, the Special Economic Zone (SEZ) rules allow temporary work from home only for a limited time period in specific cases such as for employees who are travelling, temporarily incapacitated, etc.

Given the OSP relaxations and the ‘new normal’ way of agile working, the sector expects the introduction of a more liberalised regime.

Further, with an increased focus on export earnings, the government should forthwith announce the rate of
Service Export from India Scheme (SEIS) for FY 2019-20, extend such benefits for FY 2020-21 and continue to allow such benefit in the new Foreign Trade Policy.

The resilience shown by the sector during the pandemic and the support that the government has extended has improved confidence in the long-term growth story of the sector. Innovation and progress in the technology sector will certainly be a critical factor in driving India’s broader digital ambitions. With the growth in digital demand and the emergence and adoption of new technologies, the future of the sector looks both exciting and promising.

The writer is Partner and Head – Corporate and International Tax, KPMG in India.