PM sets up panel to review taxation of development centres and IT sector

The prime minister has constituted a committee to review taxation of development centres and the IT sector. The committee will engage in consultations with stakeholders and related government departments to finalise the safe harbour provisions announced in Budget 2010 sector-by-sector. It will also suggest the approach to taxation of development centres.

The prime minister had, earlier, set up an expert committee on General Anti Avoidance Rules (GAAR), headed by Dr Parthasarathy Shome, to engage in a widespread consultation process and finalise the GAAR guidelines. The response has been overwhelmingly positive.

While this committee would address concerns on GAAR provisions and would reassure investors about the predictability and fairness of our tax regime, it was felt that there is still a need to address some other issues relating to taxation of the IT sector, such as the approach to taxation of development centres, tax treatment of "onsite services" of domestic software firms and also the issue of finalising the safe harbour provisions announced in Budget 2010.

Many MNCs carry out activities such as product development, analytical work, software development, etc through captive entities in India. They cover a wide range of fields, including IT software, IT hardware, pharmaceutical R&D, automobile R&D and scientific R&D. These are popularly called development centres. Over 750 MNCs have such centres at over 1,100 locations in India.

The development centers, which derive their strength from highly qualified, yet comparatively cheap, sources of high quality knowledge-related work, make India a global hub for such knowledge centres.

However, India does not have a monopoly on development centres. This is a highly competitive field with other countries wanting to grab a share of the pie. There is need for clarity on their taxation if we are to preserve that competitive edge.