Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Tax refund issues in software industry - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Aug 24, 2011

    Tax refund issues in software industry

    Tax issues appear to be a major problem that continues to haunt the software sector. Recently, the sector had witnessed the end of Software Technology Parks of India (STPI) scheme. This led to effective tax rates shooting up for most of the software companies. Now the new trouble brewing up for the sector is 'service tax refunds'. As per a leading daily, the Government of India needs to refund around Rs 35 bn to the Information Technology/Business Process Outsourcing (IT/BPO) sector. The amount is attributed to the service tax refunds for the past three years.

    So what is this tax refund all about? Companies need to pay 10.3% service tax for the services they use. These services include rentals, transportation, canteen services, leases, HR (human resource) audits, repairs and maintenance etc. Export-oriented units (EOUs) like software companies, are allowed to claim a refund for the service tax paid on such input services that support their output services. And herein lies the problem for the software industry.

    The government law states that the input services may be directly or indirectly utilized for the output services. But when it comes to granting the tax refund, they have asked software companies to establish the one-on-one correlation between the two. Unlike a manufacturing company, for a service oriented company it is difficult to draw a clear cut line between input and output services. Considering the nature of the services provided by the software firms, it becomes difficult to establish one-to-one correlation between them. As a result there is a big problem when it comes to claiming the refunds.

    To make matters worse, there are no specific guidelines for service tax refunds provided by the Government of India with regards to exports of software/services. In the absence of proper guidelines, tax authorities have adopted a stringent attitude towards the software companies. They are rejecting the claims on every possible ground. The rejections start with minor reasons such as insufficient documentation or the formats of invoices. The debate goes on to the co-relation between input and output services.

    As a result, rejections are piling up by the day. It has already led to legal actions taken by the companies. Looking at the seriousness of the matter, these issues are being now taken up by the industries bodies such as the National Association of Software and Services Companies (Nasscom) and the Confederation of Indian Industry (CII). The sector needs solutions for all the pending refunds. But what is more important is the formation of a clear cut policy with regards to service tax refunds for the software industry.

    The rules of tax refunds were created with a view to incentivize exporters. However, such issues defeat the entire purpose. But the bigger problem here is that software companies need to understand ways to work with the government particularly when it comes to tax issues. They have enjoyed the tax holiday for a very long time. As a result, they seem to have forgotten that the government is stingy when it comes to refunding taxes. Papers have to be in pristine order. Services have to be tracked stringently. Nevertheless, the eventual solution lies in both the government and the industry bodies sitting across the table and working things out in an amicable manner. It is to the benefit of the industry to lobby harder to work out clear cut policies on the same.



    Equitymaster requests your view! Post a comment on "Tax refund issues in software industry". Click here!

    2 Responses to "Tax refund issues in software industry"

    Yogesh Shah

    Aug 31, 2011

    A more burning issue that hits resellers across the country is that of TDS deducted to the tune of 10% while making payments. Considering low margins on reselling ,just 10 transactions are enough to wipe out entire working capital. Moreover the resellers are not providing any services and by mere definaton of law ,get entangled in Service tax Issue and subsequently in TDS Moreover tax refunds are also not a smooth sailing activity .It's high time and it should be solved urgently



    Aug 27, 2011

    a nice article.....now time has come...that a software company need to work better on tax issue as they are no longer enjoying tax holidays....but looking at the bad shape of IT recently due to recent uncertainty government should also show some proactiveness to clear the issue to keep exports growth momentum intact

    Equitymaster requests your view! Post a comment on "Tax refund issues in software industry". Click here!

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Will They Haul Off Trump's Statue, Too? (Vivek Kaul's Diary)

    Aug 16, 2017

    All across the country, the old gods become devils. New, gluten-free gods take their places...

    This Company Beat the Business World's 'Three Killer Cs' (The 5 Minute Wrapup)

    Aug 16, 2017

    And what it has in common with beating the stock market too.

    5 Steps To Become Financially Independent (Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Let's Hope This Correction Continues (The 5 Minute Wrapup)

    Aug 14, 2017

    Last week's correction is making a number of Super Investor stocks look a lot more attractive...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 16, 2017 (Close)