Technology was one of the sectors that benefitted from coronavirus lockdowns. As paradigms shifted on account of movement restrictions and closure of public spaces, tech adoption in both consumer and enterprise segments accelerated manifold. Deeper data penetration and affordable smartphones have been driving forces for digitisation in India since long. The added interest has supplemented the momentum tech industry has witnessed in the country.
However, there are issues that industry players would like to see resolved in this Union Budget 2020-21 in order to continue this momentum in the coming fiscal. Primary among them are tax issues, on both direct and indirect tax fronts.
The first tax issue that the tech industry would want resolved is Equalisation Levy (EQL). Provisions for EQL were implemented with effect from April 1, 2020. However, the industry has complained about various ambiguities such as availability of tax credit of EQL to non-residents in the home country, definition of "digital facility", applicability on intra-group services, and dichotomy between the date of applicability of provisions and date of applicability of exemption provisions.
It is expected that Finance Minister Nirmala Sitharaman would offer clarifications on these ambiguities in her third Budget Speech. These announcements will be closely watched by global tech giants, who have expressed their reservations over the digital tax.
Tech industry expects clarity on Significant Economic Presence (SEP) provisions, set to be implemented from April 1, 2021, in the upcoming Budget. There is an overlap between SEP provisions, withholding tax provisions, and EQL provisions. Industry watchers have urged the government to provide clarifications on the expected interplay between these provisions. Further, even the SEP thresholds should be notified by the government soon or alternatively and the SEP provisions should be deferred until the provisions are clear and thresholds fixed.
Cloud services have become popular amid the new normal. However, it has been riddled by certain concerns. Cloud-based transactions are essentially in the nature of services and ordinarily do not allow the user any right to the infrastructure. But applicability of TDS on cloud payments, specifically on services provided by foreign players, has emerged as a hotbed of litigation, with the tax authorities treating payments for cloud services as royalty or 'Fee for Technical Services'. Clarity on this front is expected to come in Budget 2020-21.
E-commerce players have been perturbed by opacity on Advertisement Marketing and Promotion (AMP) expenditure for promoting their products. The tax authorities treat such expenses as brand-building expenditure and as capital in nature, even though the benefits of such expenditure are temporary and short lived. Hence, it is expected that the government would come up with a clarification on the treatment of AMP expenses to end speculations.
Both customs and transfer pricing laws require taxpayers to establish arm's-length principles on transactions undertaken between related parties. The main objective under the respective laws is to provide safeguard measures and ensure that taxable values on which respective taxes are levied are correct. Technology players expect to see a common platform that would provide a middle-path of arm's length price that is equally acceptable under customs law and transfer pricing.
GST refund paid on capital goods where the same is used in export/zero-rated supplies is not available under the GST regime. Capital goods form a large part of investment for businesses and a situation of restricting refunds only to inputs and input services and not to capital goods leads to spike in pricing, cash crunch, and blockage of working capital. Therefore, refund of input tax credit on capital goods should be permitted through an amendment to the provision.
Industry would also be looking forward to investment-driving measures, like extending production-linked incentives to more segments of electronics manufacturing. Since investments in tech sector have a multiplier effect on the economy, policy measures or allocations to this would be welcome. The government has already announced PLI schemes for manufacturing of mobile phones, semiconductor fabs, display fabs, laptops, servers, IoT devices, and specified computer hardware.
With rising demands for data localisation and extensive digital adoption, policy announcements related to Data Centre and Cloud Services will be eagerly awaited in this Budget. Policy measures to support this nascent sector in India are expected in Budget 2021.