Defer PoEM norms, remove tax barrier for startups: says Nasscom

Nasscom President R Chandrashekhar said "serious concerns remain over intangibles (like software) not being clearly mentioned as service and also on issues like place of provisioning of service, and taxation of intra-corporate transactions".

Nasscom asks for tax breaks for startups. Photo: Pixabay

Amid economic and geopolitical headwinds and challenges to the IT sector, Nasscom has asked the finance ministry to defer applicability of Place of Effective Management norms to maintain India's competitive edge and pitched for tax sops in R&D.

The association has been "disappointed" by the draft goods and services tax (GST) law made public on Saturday, with Nasscom President R Chandrashekhar saying "serious concerns remain over intangibles (like software) not being clearly mentioned as service and also on issues like place of provisioning of service, and taxation of intra-corporate transactions".

In its pre-Budget wish-list to the finance ministry earlier this week, Nasscom has also pushed for removal of constraints related to funding and taxation of start-ups through lowering of long-term capital gains tax rates (on sale of unlisted shares) for domestic investors to 10 per cent at par with non-residents.

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It sought harmonisation of tax rates for angel investors. Further, it has asked the government to address ambiguities in e-commerce taxation such as service tax on aggregators as also the issue of dual levy of VAT and service tax on delivery charges of goods.

The industry is facing "significant headwinds globally, and the problems being faced overseas by this critical sector should not be compounded by domestic taxation issues like the GST", Chandrashekhar told PTI.

In its pre-Budget memorandum, Nasscom has said that in order to counter rising global protectionist barriers, the sector relies on the government, and policy measures should ensure the Indian IT industry does not face difficulties on the home stretch.

Noting that the proposed PoEM will have an adverse impact on outward investments and can also affect investments in India as companies would be wary of their global profits being taxed due to the new provisions, Nasscom said, "We suggest that applicability of PoEM be deferred and made applicable with effect from assessment year 2018-19."

It added: "Given that the PoEM rules and enabling provisions are still not notified, it is suggested that the implementation of provisions be further deferred such that the rules are available much before the date of implementation."

Nasscom made a pitch for clear and unambiguous POEM guidelines with "suitable transition provisions that should be notified to allow companies to comply". Some key areas where such guidance is sought include withholding tax obligations, dividend taxation and computation of depreciation.

In addition, Nasscom said IT companies are not explicitly eligible for weighted deduction on the R&D expenditure although such incentives are enjoyed by biotech companies. It has suggested that rules be amended to extend such R&D related tax incentives to firms engaged in development and sale of software too.

PoEM rules, which are set to come into effect from April 2017, entail a two-stage process for determining the place of effective management of a company, with a view to assessing its tax liability -- the first would be identification of the persons who make the key management and commercial decision for the company and second, the determination of the place where these decisions are made.

"Holding global board meetings in India may facilitate their (a company's) investment decision in the country. The rules should not discourage global companies from conducting doing global activities in India for the fear of tax implication. It will hurt investor sentiments," Chandrashekhar said.

Stating that transfer pricing disputes continue to be a high-impact area for the sector, Nasscom said the steep "safe harbour" margins, currently between 20-30 per cent, remain ineffective and need redefinition for adoption by the sector.

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