New SEZ rules, R&D spends top Indian IT wishlist for upcoming budget

The Covid-19 pandemic has led a mass-scale value and supply chains overhaul at globally present information and technology service vendors, changing the way employees approached their 9-to-5 jobs.

SEZ rules in line with the new normal, more funds for research and development as well as resolution of taxation issues have emerged as the key expectations at Indian IT services companies. 

IT industry lobby body NASSCOM told TechCircle that it is closely working with the commerce ministry to amend the special economic zone (SEZ) rules, which will enable the industry to plan on a long term basis within such zones.

“That's something, we’re hoping, will get notified soon. It could be notified in the union budget itself, as part of a set of reforms with respect to remote working and work from home,” the IT lobby group’s head of public policy, Ashish Aggarwal said. SEZs are cordoned areas where business and trade laws are different from the rest of the country.

From a dip in business and opacity in financial forecasts, to subsequent recovery on back of new deals, IT service firms in India and abroad have come full circle, in culmination to the fresh fiscal’s aptly named Covid budget.

Read: Tier-I IT services firms regain strength in a seasonally weak quarter

"With the finance minister set to present the most challenging budget of her tenure, the IT sector, which anchored a pandemic ridden economy, is hopeful of finding a resolution to the digital taxation fault lines and enable foundational support for the post pandemic operating environment,” Naveen Aggarwal, a partner at KPMG said in a statement.

He added that there was immediate need to address ambiguities around the scope and applicability of the expanded equalisation levy (EL) provisions, as well as whether services delivered by employees of SEZ based IT-ITeS units, virtually from their home location, shall be eligible for income-tax holiday -- a concern that Nasscom also has raised.

In other expectations from the government, in the sector, Pune based Tech Mahindra said research and development spending must be increased in order to accelerate digital transformation, and jumpstart education with focus on next-gen technologies, skilling, reskilling and upskilling programs towards an Atmanirbhar Bharat (self-reliant India).

“We expect the government to create a fund for product companies along with extended SEZ benefits in the new normal of remote working, besides nurturing an ecosystem for deep tech startups in areas including blockchain, artificial intelligence, augmented reality and virtual reality,” Tech Mahindra MD and CEO CP Gurnani said.

Hyderabad based Cyient chimed in with similar sentiments. “We are hopeful of increased research and innovation enabling more intellectual property to come from India in the budget from the finance minister. Companies are also eagerly awaiting a central Research & Innovation Fund to help build up intellectual property out of the country,” the company’s president and COO Karthikeyan Natarajan said.

Tally Solutions added that there is a need for a framework to work in synergy and ease in certain taxation issues followed by the software product industry.

CFO Ganesh Subramanian said that the current 10% tax deducted at source (TDS), applicable on software purchase, particularly at cash starved startups becomes an extra spending. “We expect that the government either remove this TDS, or at least reduce it to 2%,” he said.

He also said that there is no clarity about Harmonized System Nomenclature codes or Services Accounting Codes (HSN/SAC) for software products, especially in case of software products delivered through electronic medium and software-as-a-service hosted on cloud platforms.

“Till FY 2020, software product companies were enjoying the benefit through tax incentive for their spends on research and development. Such benefits were extended in the form of additional deduction under section 35(2AB) of the Income Tax Act. This benefit has been withdrawn effective 01 April 2020.  The government may extend such incentive schemes or equivalent benefits, in order to promote Research & Development in the Software product sector,” Subramanian said.

“The tech sector expects that the Union Budget will make provision for extension of software exports incentive scheme under the Foreign Trade Policy beyond FY2021… It (a robust digital infrastructure) will also enable rapid adoption of technology in the education sector which can facilitate skilled resources to the industry and allow companies to implement work-from-home or hybrid models more efficiently,” L&T Technology Services MD and CEO Keshab Panda told TechCircle.