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Tax refund issues in software industry - Views on News from Equitymaster
 
 
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  • 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.

     

     

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    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

    Like 

    pradeep

    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

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