The President of India recently approved the 2008 Finance Bill. The policies mentioned in the bill are likely to cap clients’ investments in the country and give a tough time dealing with increased costs of operations.
“The changes would severely impact its outsourcing relationship with the U.S. Even though India is a key player, it is set to lose its charm due to already prevalent concerns such as rising wages, rising rupee, improper infrastructure, and recently announced ‘tax policy changes’,” says Don Jones, International Tax Partner, Technology Practice, BDO Seidman, the U.S.-based accounting firm.
According to Jones, the tax policies that will impact the India-U.S. relations in the future are: An increase in transfer pricing regulations, expiring tax holiday benefits for Indian software exporters in Mar. ’09; an increase in India’s capital gains tax from 10 percent to 15 percent; a shortened deadline for corporate tax filing (from Oct. 31st to Sept. 1st); and the Clarifications in Section 65A regarding the principles for classifications of taxable services, including: Software maintenance and consultancy will be subject to service tax; packaged software will be subject to excise duty at 12 percent (formerly 8 percent); telecommunications services provided though Internet will be subject to service tax.
The changes mentioned in India’s 2008 Finance Bill would severely impact its outsourcing relationship with the U.S. Even though India is a key player, it is set to lose its charm due to already prevalent concerns such as rising wages, rising rupee, improper infrastructure, and recently increased ‘tax policy changes’.
— Don Jones, International Tax Partner, Technology Practice, BDO Seidman
These tax policy changes are already creating a buzz in the industry. Will it impact the buyer of services?
“We expect the transfer pricing to become more standardized in terms of the mark-up percentages. Most overseas-based firms in the services space operate at 8 to 15 percent margins, whereas the well-known Indian counterparts operate at 20 to 25 percent margins. Any attempt to regulate transfer-pricing regulations based on the margins of the Indian firms will not be a positive move for the overseas-based firms with operations in India,” Avinash Vashistha, CEO, Tholons, an investment advisory firm.
In response to expiring tax holiday benefits for software exporters in Mar. ’09, companies would try to tighten the bottom line. Big players would also move into SEZs to protect the tax benefits. However, as the market gets matured, the leaders will have to accept lower margins. The impact of this on the smaller players is expected to be more, as they are not prepared to move into SEZs. However, “the increased taxes on packaged software are a retrograde step — India’s strength is the services space, which will include development of packaged software,” exhorted Vashistha.
In the end, any increase in tax policies increases the cost of doing business. Thus, more concentrated efforts on productivity are warranted to offset these costs.
Firms [customers] are looking at an India strategy to help grow their top line by addressing the growing India market. An improved U.S. economy will definitely help in garnering foreign investments, as businesses will start looking for strategic investment options.
— Avinash Vashistha, CEO, Tholons
