IT Taskforce
Basic Background  Report
9th June 1998


 

II. DIRECT TAX RELATED ISSUES

2.1 IT as Infrastructure

1. Declaring Electronics and Information Technology as "Infrastructure Facility" under Section 80-IA of the Income Tax Act.

The Working Group for Electronics Industry set up for the IXth Plan by the Planning Commission had recommended that the Electronics and Information Technology industry should be classified as a basic growth infrastructure industry. Based on a decision taken on 3.7.97 in a meeting of the Committee of Secretaries it had been decided special incentives for investments in the Information Technology Sector, may be considered by the Ministry of Finance. This subject was also related to a Lok Sabha Assurance wherein it was stated that action is being taken on the recommendations of the Working Group. Accordingly, recommendations were sent , for classifying Electronics & Information Technology Industry as infrastructure to MOF. Action by MoF should be expedited.

Incentives available by declaring IT & Electronics as Infrastructure facility are:

i) Tax holiday under Section 801A

ii) Inclusion of investments made in debentures and equity shares of public companies engaged in providing IT services for the purpose of tax rebate under Section 88.

iii) Complete depreciation on computer software and communication items for setting up the IT infrastructure in two years.

iv) Exemption from Excise Duty on local language based computing products to enable increased use of computers.

v) Customs duty as applicable in case of setting up infrastructure projects like power, telecom be applicable on computing equipment including communication equipment required for setting up IT infrastructure.

vi) Any unit being set up under such schemes as Software Technology Park (STP)/Electronics Hardware Technology Park (EHTP)/Export Processing Zone (EPZ)/Export Oriented Unit (EOU)/Export Promotion Capital Goods Scheme (EPCG) may get additional benefits.

vii) Deduction from Profits and gains of business - Under Clause (viii) of sub-section (1) of Section 36, in respect of special reserve created by a financial corporation which is engaged in providing long-term finance for "infrastructure facility" in India, an amount not exceeding 40 percent of the profits derived from such business of providing long term finance is allowed as deduction.

viii) Section 54 EA - Capital gains is tax exempted where net consideration received on transfer of an asset is invested in bonds, shares or debentures of a public company. The public company is expected to largely (60%) utilise the funds raised in infrastructure projects specified in Section 80-IA for power, basic telephone services, exploration/expectation of oil and natural gas.

ix) Section 54 EB - A provision similar to section 54 EA where capital gains can be invested in specified assets to offset capital gains tax.

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2.2 Income Tax Concessions

i) Provisions of Section 80 HHE of the Income Tax Act provide for income tax exemption to profits derived from software and services exports. The benefits of this section should continue and some of the provisions be suitably amended as given below:

• Formula change : No relation to domestic turn over.
The profits of software exporters engaged both exports and domestic market activities are presently computed on the basis of a formula. The formula computes profits in proportion to sales in the respective markets. In this process software companies have to pay a disproportionately high tax on the profits from their domestic sales.

• Definition of export turnover need to be changed and technical services defined.

• Profits of overseas branches should get tax benefits.

• Clarification to be issued that the definition of computer software under Section 80 HHE also includes data processing data conversion activities and other computer software services which are integral part of computer software development.

• Benefit of Section 80 HHE deduction for sub-contractors in respect of profit from export of computer software to continue for ten years.

ii) Status-quo of Section 80 O of the Income Tax Act should allow 50 percent of all foreign exchange brought into India by a Company to be exempted from the Income Tax Act should continue for ten years.

iii) Computer software and services should be considered as manufacturing activity for the purpose of Section 10 (15) (iv) of the Income Tax Act.

iv) The current benefits of Section 10A and 10B of the Income Tax Act should continue for ten years.

2.3 Service Tax Exemption

i) Service tax should not be applicable on computer software and IT services industry/professionals.

ii) Payment towards licence fee for all kinds of computer software should be exempted from withholding tax through incorporation of suitable amendments in the 'explanation' of Section 9 of the Income Tax Act. In other words, no withholding tax need be deducted while making payment towards licence fees of computer software.

2.4 Tax Incentives for Promotion of Applications

i) Allow 200 percent of the expenses on R&D by Indian Software Companies from income tax liability.

ii) Creation of Computer software products and packages should get R&D benefits under Section 35(2AB) of the Income Tax Act.

iii) Attract IT/Software professionals of Indian origin from overseas with experience of more than three years to work in India by not requiring such professionals to pay income tax on their salaries in India for a period of upto three years.

iv) IT/Software companies locating their businesses in towns/cities of less than 100,000 population may be given encouragement by waiving Corporate Income Tax, Sales tax etc.

v) IT/Software companies employing women IT specialists to the extent of more than one third of the SW professionals, may be given special income tax rebates as this is one of the highly intellectually satisfying but least physically taxing profession for women.

vi) The Software/IT companies creating 'x' number of jobs of a duration of 'y' years, shall be exempted from certain taxes, provided an amount equal to the exempted taxes is ploughed back into the expansion of the company to provide more jobs or make the company more competitive in international markets.

2.5 Gift & Income Tax Exemption for PC/IT Products

No gift tax for the giver or Income Tax for the taker on PCs costing upto Rs. 50,000 for fully residential use.

2.6 Income Tax Exemption for Domestic Sale of Software

Indian Software Exporting companies may be encouraged by allowing say upto 25 percent of their domestic sales exempted from Corporate Income Tax.

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