Bengaluru : A recent advance ruling by tax authorities, making back-office services provided by a company to global firms taxable under the goods and services tax (GST), has sent shock waves through the information technology (IT) and business process outsourcing industry.
While the National Association of Software and Services Companies (Nasscom) has come out strongly against the ruling demanding clarity, tax experts are of the opinion that it will open up a Pandora’s Box, leading to litigation in the coming days.
Though an advance ruling is only applicable to the applicant party and cannot be considered a precedent for future rulings, the IT/IT enabled services (ITeS) industry is worried the interpretation of the ruling may result in losing tax benefits that the sector is currently enjoying, as its services have been categorised as exports.
“The recent ruling by the Authority of Advance Rulings (AAR) – in the case of M/s Vservglobal – has taken the industry by surprise as it seeks to treat services provided on ‘own account’ basis as ‘intermediary’ services,” Nasscom said in a statement on Monday.
“This could lead to unwarranted disputes and uncertainty in case of exports as once a service is treated as ‘intermediary’ under the GST, these would not qualify as export even if they are rendered to overseas entities,” the industry body added.
According to the AAR ruling, back-office support services qualify as intermediary services and not exports. This means, all the IT services players and business process management firms, along with global in-house centres (GICs) of multinational firms, will now be liable to pay 18 per cent GST on their services.
Since India is a large hub for exports of an array of ITeS with exports of over $126 billion in 2017-18, the ruling can result in substantial tax demand against all the big players. Apart from IT and ITeS players, this will also have a direct impact on more than 500 GICs in the country, which cumulatively employ more than 350,000 people.
“If the implication of this ruling is not suitably clarified, it will make our companies non-competitive in the global market, potentially resulting in loss of revenue, jobs, and customers,” Nasscom said.
According to legal experts, though the verdict is an advance ruling, lack of clarity on the categorisation of services will create confusion in the IT industry.
“In case of an intermediary services contract, usually three parties are involved. Now, if the companies working in the IT services space are party to any such tripartite contract, that amount of service can be interpreted as intermediary services and will be liable to taxation,” said Gyanendra Tripathi, partner (tax & regulatory services) at global audit firm, EY.
He, however, added there are legal remedies available against the ruling, as they can be challenged before the appellate authority.
Other tax consultants working in the corporate tax domain said companies should not jump the gun fearing tax demand from retrospective period, as interpretation of tax law is very case specific.
RBI-industry meet: India Inc pitches for rate cut to prop up growth
New Delhi: Ahead of the monetary policy review, India Inc urged the Reserve Bank of India (RBI) to cut interest rate and reserve ratio to prop up growth.
In a meeting with RBI Governor Shaktikanta Das in Mumbai, industry chambers suggested various measures to ease tight liquidity situation and reduce high cost of credit in the light of consistently falling inflation.
The Confederation of Indian Industry (CII) suggested the policy measures required to ease the tight liquidity situation by effecting a cut in cash reserve ratio (CRR) by at least 50 basis points (bps), measures to facilitate flow of credit to industry, especially to MSMEs and the infrastructure sector, and steps to address the high cost of credit by considering a reduction of 50 bps in repo rate given that inflation has been consistently low, the chamber said in a statement.
Suggestions come ahead of the sixth bi-monthly monetary policy statement for 2018-19 scheduled to be announced on February 7.
CRR, currently at 4 percent, is the percentage of deposits kept as reserves with the RBI. Repo rate, currently at 6.5 percent, is the rate at which the central bank gives loans to the banks.
CII lauded the RBI for steps taken to ease financing challenges faced by the real sector, especially micro, small and medium enterprises (MSMEs), through various measures such as reducing Turn Around Time (TAT) and measures to boost liquidity in the economy.
On measures to address the financial challenges faced by the MSMEs, CII suggested that the RBI consider limiting the collaterals sought by banks to 133 percent of the exposure and eliminate the need for personal guarantees where sufficient collateral exists.
The chamber delegation, led by its president designate Uday Kotak, also suggested that letters of undertaking (LoUs) for buyers’ credit for the cases where MSMEs investing to expand capacity may be permitted and the RBI might consider allowing banks to sanction buyers’ credit facility to MSMEs, wherever import of raw materials is being done under letter of credit.
The Federation of Indian Chambers of Commerce and Industry (FICCI) also made a pitch for a cut in repo rate and CRR to enable lowering of lending rates by banks.
A reduction in repo rate and CRR would help in reviving the investment cycle in the country and will also boost consumption and support growth, FICCI President Sandip Somany said.
It will also help in reviving the investment cycle in the country and will also boost consumption and support growth.
“The need of the hour is to have an accommodative monetary policy, focusing on growth. The objectives of the Monetary Policy Committee should not be restricted to only price stability but also to consider growth and exchange rate stability,” he said.
On the RBI’s February 12 circular, CII highlighted that while it was aimed at improving the credit discipline and early identification of probable defaults, but it has, however, put pressure on already distressed sectors impacted due to business performance reasons and, hence, should be given sufficient time to resolve the defaults.
Among many key recommendations, CII recommended that the RBI may revisit the lending restrictions on the weak banks under prompt corrective action and consider allowing them to lend to the National Housing Bank which, in turn, can be used to finance housing projects through housing finance companies (HFCs).
The Associated Chambers of Commerce and Industry of India (Assocham) suggested that the economy needs credit loosening so that liquidity can sustain the growth.
The fundraising capability of NBFCs/HFCs has reduced significantly, warranting support from the government. They need to be provided the alternate options for raising funds. This is imperative not just for the health of NBFCs/HFCs but for sustaining the GDP growth rate as well,” Assocham said.
Sectors such as textile, handicraft and leather goods need to be given interest subvention to boost their export capabilities, it said, adding that the rate of interest subvention should be increased from 3 percent to 5 percent to take into account the combined effect of the commercial interest rate and the prevailing inflation.
Telecom sector may stabilise soon post-consolidation: Trai
New Delhi: Trai chairman RS Sharma expressed hope that the telecom sector is set to achieve stability soon post consolidation and the country needs heavy investment in fibre if it is to succeed in 5G technology and services roll out.
“My sense is that the sector is going to acquire stability and looking at the examples around the world scene 3+1 (3 private players and a PSU) is a good number and I don’t see it going down from that,” Sharma said here.
The Indian telecom operators are now reduced to three -Airtel, Vodafone-Idea and Jio and BSNL-MTNL following a bloody battle on tariffs that has seen shut down of operations of many fringe telcos and merger of two big telcos to take on Reliance Jio which unleashed a free and cheap service era that catapulted India to be data consuming nation ahead of US and China combined. But in the process, the incumbent telcos have bled on revenues and profitability and have found it diffcult to even service spectrum loans.
While the talk of India not missing the 5G bus is loud on private telcos and the government, the Trai chairman had a word of caution — India can be a frontrunner in deployment of 5G but a lot will hinge on bolstering investments in fibre infrastructure, which is currently inadequate and trailing countries like China.
“In 5G space, we can leapfrog inadequacies which we have in physical world, all of which can be overcome with use of information and communication technologies…There is a serious concern that while people are talking of 5G as a slogan but it won’t happen unless we put a lot of investment in fibre. Without fibre, 5G will not happen. 5G is going to have important use-cases in India because it will be a platform over which all the applications will be run. But it will not happen if there is no fibre”, Sharma said. He was speaking at the India Digital Summit organised by Internet and Mobile Association of India (IAMAI). At the same time, he said the investment need not just come from the TSPs (telecom service providers) it should also come from eco system companies as well.
“It is not just telecom companies that will need to invest. There are several avenues to generate investment and we are already seeing it happen now.” For instance, telecom service providers are already sharing tower. Infrastructure sharing could be one of the keys for the 5G network,” Sharma said. He said the fiberisation of the whole country is a must for the success of 5G.
India has only 22 per cent of mobile towers connected on fibre, while 78 per cent are without fibre, on wireless. China on the other hand, has 80 per cent connectivity through fibre and the rest through wireless. The optical fibre cable laid today till date is equal to optical fibre cable laid in China in one single year,” Sharma said adding fixed infrastructure will be critical for attaining a reliable and sustainable growth. Policies need to focus on promoting investments in infrastructure, he said.
“The National Digital Communications Policy (NDCP) contains those set of policies and statements and we need to operationalise those to ensure investment,” Sharma said. The new telecom policy – NDCP – aims to attract USD 100 billion investment and create four million jobs in the sector by 2022. It seeks to provide universal broadband connectivity at 50 Mbps to every citizen by 2022, and also talks of enhancing the contribution of digital communications sector to 8 per cent of India’s GDP, from the about 6 per cent now.
The TRAI chief further said there would be a need to unbundle service and infrastructure layers at some point, and fibre sharing could be one of the options in infrastructure sharing. “We think end-of-end service provisioning will not happen in 5G,” Sharma said. He further said, the connectivity problems in the country need to be solved with urgency, and regulations should not be “constrained” by the fact that only a certain set of service providers should provide a particular service. “No one should have the monopoly of providing services to people of this country, and we should solve this problem by whatever means and instruments we can deploy,” he said.
GDP growth likely to be tad higher at 7.5 pc in FY20, says Ind-Ra
New Delhi: The country’s economy is likely to grow a tad higher at 7.5 per cent in 2019-20 on account of steady improvement in major sectors — industry and services, said India Ratings and Research (Ind-Ra).
According to the advance estimates of the Central Statistics Office (CSO), the economy may clock a growth rate of 7.2 per cent in the current financial year, up from 6.7 per cent in the previous year.
Ind-Ra, a Fitch Group company, expects gross domestic product (GDP) growth to be a “tad higher” at 7.5 per cent in fiscal 2019-20.
After demonetisation and the GST implementation, the agency had expected 2018-19 to be a year of quick recovery and, indeed, the recovery has been sharp with GDP growth coming in at 7.2 per cent, it said.
It further said GDP growth would have been even better but for the global headwinds caused by an abrupt rise in crude oil prices and strengthening of the US dollar, among other factors.
“However, GDP growth in 2019-20 will be more dispersed and evenly balanced across sectors as well as demand-side growth drivers,” Ind-Ra said.
Over the past few years, private final consumption expenditure and government final consumption expenditure have been the primary growth drivers of Indian economic growth.
Ind-Ra said it believes that investments are slowly but steadily gaining traction, with gross fixed capital formation growing 12.2 per cent in the current fiscal and projected to clock 10.3 per cent in the next year.
“This is certainly a comforting development, but the flip side of this development is that it is primarily driven by the government capex (capital expenditure), as incremental private corporate capex has yet to revive” it said.
It further said that due to the slowdown in private corporate and household capex, GDP growth has failed to accelerate and sustain itself close to or in excess of 8 per cent.