The onset of Covid-19 pandemic has served as a catalyst for digital and technological adoption across various industries. This has led to an exponential growth of the technology sector, which has made a significant mark for India on the world map.
Over the past few years, technology has played a very important role in the evolution of the tax landscape as well. Assessment proceedings and appeals are now being conducted in a faceless manner. The Tax Department makes extensive use of data analytics for unearthing undisclosed transactions. Corporates have started making immense use of technology to assist them in their GST and TDS compliances, reconciliation of tax records with books of account, tracking of tax litigation, etc.
Having regard to the significant contribution of the technology sector to the Indian economy, it is imperative that the budget caters to some of the key asks of the industry on the tax front and help the cause of ease of doing business. In this regard, some of the key budget expectations of the technology sector are outlined below.
Clarity vis-à-vis taxation of transactions
Over the past one year, we have witnessed a significant spurt in investment in cryptocurrencies. However, there is lack of clarity regarding the mechanism for taxation of income and GST implications of transactions involving cryptocurrencies. The need of the hour is for the Finance Minister to lay down clear norms for taxation of cryptocurrency transactions and the reporting requirements thereon.
Section 10AA of the Income-tax Act provides for tax holiday to SEZ units who export goods or services from SEZ. The global impact of the Covid-19 pandemic has led to major shift to a novel, hybrid work model that has redefined the dimensions of an evolving workplace and work culture. This has become the new normal and is likely to continue in the future. With a view to provide clarity to taxpayers and avoid any litigation, it should be clarified that the tax holiday under Section 10AA will be available to SEZ units even where employees work from home, provided there is a direct nexus between the work performed by the employee and the SEZ unit and the deliverable is exported from the SEZ unit.
India was one of the early movers in introducing unilateral measures to tax digital transactions involving non-residents. In 2016, India introduced Equalisation Levy (‘EL’) on online advertisements, which was later on expanded to cover all transactions involving online sale of goods and provision of services by non-resident e-commerce operators. Apart from the fact that the scope and coverage of EL is extremely wide, there are several ambiguities surrounding the interpretation of the EL provisions. With implementation of OECD Pillar 1 & 2 proposals, the taxation world would witness a complete overhaul of the global tax norms in 2023, which should pave the way for withdrawal of EL in India. It may augur well for the Finance Minister to indicate clear timelines for withdrawal of EL, to enable taxpayers to breathe a sigh of relief on that front. Till the time the new proposals are implemented, paving the way for withdrawal of EL provisions, the government may consider demystifying the controversial issues under the current provisions.
Tax dispute mitigation & resolution
The Indian taxation regime has been plagued with significant litigation, with lakhs of cases pending before appellate authorities and courts. In the past, the government had introduced the Vivad Se Vishwas scheme, which significantly helped in curtailing existing litigation. The Finance Minister may now consider introducing a mediation scheme allowing for a negotiated settlement of disputes between taxpayers and the Tax Department, which would help in curbing litigation and quicker collection of taxes going forward.
The Indian Advance Pricing Agreement (APA) programme has been a good success story and has matured over the years. However, currently there are hundreds of APA cases pending for disposal. Further, the time generally taken to dispose of APAs is more than three years. One of the reasons for the delay in disposal of the APA cases is shortage of human resources. The Finance Minister may consider strengthening and fast-tracking the APA programme in order to clear the backlog of cases and provide certainty to taxpayers.
The government has taken few policy initiatives, which have given a significant boost to the technology sector. While the initiatives taken by the government on policy front are commendable, there is a need for parallel focus on resolving the tax issues impacting the sector and provide a platform to compete with the global players. All in all, we hope that Budget 2022 gives a much-needed “booster dose” to the economy and puts it back on the high growth trajectory in line with the ambition of India fast forwarding towards becoming a US$ 5 trillion economy.
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