Budget 2015: The new growth paradigm for the IT/ BPO sector

In the backdrop of buoyant growth projections, positive investor outlook and the promise to have a non-adversarial tax regime, let's evaluate the Budget 2015 proposals impacting the IT/BPO sector. The Finance Minister highlighted in his speech that India has emerged as a well-regarded and world-class IT industry that has contributed significantly to its economic growth, exports and employment generation.

The government's thrust in the Budget on growth, infrastructure, job creation and skill development is likely to have a positive impact for the IT/BPO sector. The FM recognised the importance of IT start-ups and the need to address various concerns in order to achieve sustainable growth and employment generation in this sector. Allocation of funds for setting up SETU (Self-Employment and Talent Utilisation) mechanism to support start-ups is a step in the right direction. The FM's focus on harmonising the efforts on skill development through National Skills Mission is likely to extend necessary skill support to the sector. Proposal to create Innovation Promotion Platform for creating competitive skills to bring India on par with global competency benchmarks is a forward looking step for the industry.

While the IT/BPO industry had several specific expectations from this Budget, the FM's tax proposals need to be evaluated keeping in mind the intention of gradual transition from an exemption-based to an internationally competitive tax regime with certainty, transparency and stability.  The proposals around deferral of GAAR by two years with prospective application, increase in domestic transfer pricing threshold from Rs. 5 Crore to Rs. 20 crores and gradual reduction in headline corporate tax rate over four years from 30 per cent to 25 per cent, with phase-out of industry specific exemptions/ incentives and amendments to the indirect transfer laws to provide clarity are steps in the right direction.

Reduction of tax rate on royalty and technical services fees from 25 per cent to 10 per cent is in line with the industry demand and will reduce the cost of importing technology and incentivise technology adoption by small businesses. This would also make India tax competitive in the global arena and align the domestic tax rate with most of the prevailing tax treaties.

The Budget has also empowered CBDT to notify a mechanism for claiming foreign tax credit. This will hopefully bring the much needed clarity to domestic IT/ BPO companies currently grappling with ambiguous foreign tax credit rules.

However, Budget 2015 fails to address specific expectations of the industry on phase-out of MAT on SEZ units and clarification on retrospective expansion of royalty definition. Gradual reduction of MAT on SEZ units would have gone a long way maintaining the competitiveness of the industry, more so in view of the government's intention to reduce the corporate tax rate to 25 per cent over the next four years.

On the indirect tax front, increase in service tax rate from 12.36 per cent to 14 per cent is in line with the government's commitment to introduce GST effective April 2016.  Increase in time limit for availing CENVAT credit on input services from six months to a year would ensure maximisation of credit utilisation of the industry.

Budget 2015 provides an excellent platform to fuel the next phase of growth for the industry with its forward looking policies and renewed focus on the importance of start-ups, skill development, innovation, firm resolve to introduce GST and a competitive tax environment.

(The author is Partner - Tax at KPMG India)