New Delhi, Jan 22 (PTI) The National Association of Software and Service Companies (Nasscom) has unveiled a comprehensive set of recommendations for the upcoming Union Budget, focusing on tax reforms to bolster India's technology sector. The industry body, representing a diverse range of IT companies and tech players of varying sizes, is advocating for measures that would enhance competitiveness, spur innovation, and address critical operational challenges.
Expanding ESOP Tax Benefits for Startups
One of the central proposals from Nasscom is the extension of Employee Stock Option Plan (ESOP) tax deferment to a broader spectrum of startups. Currently, this benefit is limited to fewer than 4,000 startups with Inter-Ministerial Board certification, out of over 1,59,000 recognized by the Department for Promotion of Industry and Internal Trade (DPIIT). Nasscom argues that expanding eligibility to all DPIIT-recognized startups would make the regime more meaningful, enabling these emerging businesses to attract high-quality talent and compete effectively with larger, established firms.
Ashish Aggarwal, Vice President of Public Policy at Nasscom, emphasized the importance of this move in an interview with PTI. He noted that the industry is navigating a complex landscape, having reached nearly USD 300 billion in revenue but facing slow growth in recent years amid global market challenges. "ESOPs are crucial for startups to meet their talent requirements," Aggarwal said, highlighting how tax relief could unlock potential in a sector poised for expansion with the advent of artificial intelligence (AI) and a robust domestic market.
Clarifying Tax Treatment for Data Centers
Nasscom is also seeking clarifications in the Income Tax Act regarding the tax treatment of foreign cloud service providers using Indian data centers. The association proposes that procuring hosting or co-location services from an Indian data center operator should not create a business connection or permanent establishment for the foreign provider. This is based on the premise that arm's length payments to Indian operators adequately cover India-based functions, with the cloud provider merely interacting remotely as part of a global system.
This clarification is seen as vital for India's data center sector, which drives digital and AI growth by offering services to global players. By removing tax uncertainties, Nasscom believes it would encourage more investment and innovation in this critical infrastructure domain.
Easing Working Capital Pressures
To alleviate financial strain on IT/ITeS and e-commerce companies, Nasscom recommends reducing the pre-deposit requirement for staying tax demands during appeals. Currently, companies must deposit 20% of a disputed tax amount, which can severely impact working capital and disrupt business continuity. Nasscom advocates lowering this to 10%, aligning with GST laws, and implementing a cap on the maximum pre-deposit amount.
Aggarwal explained, "In GST, the government reduced the pre-deposit amount from 20% to 10%. This unclogs working capital, and a similar approach under income tax would benefit tech firms." Additionally, Nasscom is pushing for clarity to prevent tax refunds from being adjusted against stayed demands, thereby freeing up liquidity and avoiding unnecessary financial strain during disputes.
Supporting Mergers and Acquisitions
Another key suggestion involves extending the carry-forward and set-off of accumulated losses and unabsorbed depreciation benefits to all companies during amalgamation or merger, regardless of their business nature. Currently, these benefits are restricted to specific categories like industrial undertakings and banking companies, excluding the services sector. Nasscom argues that as mergers and acquisitions become more prevalent in the tech industry, this change would facilitate smoother transactions and support growth.
Aggarwal pointed out, "Given the trends in our industry, where we are seeing a lot more mergers and acquisitions happening, this is an easy fix that can be taken up by the government."
Broader Budget Recommendations
Nasscom's pre-Budget memorandum includes several other proposals aimed at fostering a conducive environment for the tech sector. These include expanding the eligible utilisation of SEZ Reinvestment Reserve to cover leased tech assets, cloud infrastructure, software subscriptions, interiors, facilities, and new-hire or training expenditure supporting authorised SEZ operations. Such measures would enhance the attractiveness of Special Economic Zones (SEZs) for technology companies.
Reflecting on the industry's context, Aggarwal noted that while global challenges persist, new opportunities are emerging with AI and a strong domestic market. "Given this context, it is interesting to look at what we can enable as an industry, and the government can enable through the tax policy regime," he said, underscoring the collaborative effort needed to drive future growth.
Overall, Nasscom's recommendations aim to create a more supportive tax framework that addresses immediate concerns while positioning India's technology sector for long-term success in a rapidly evolving global landscape.
