CII agenda for ITeS industry

New Delhi: In a meeting with Minister for Parliamentary Affairs, Communications and Information Technology Pramod Mahajan on 29 January, the Confederation of Indian Industry (CII) outlined a 15-point agenda for the IT-enabled services (ITeS) industry.

CIIs suggestions to the minister covered regulatory, infrastructural and procedural issues on one hand, and direct tax-related issues on the other. The CII team at the meeting included CII (national committee on IT) chairman and Hewlett Packard president Arun Thiagarajan, Hero Corporate Services MD Sunil Kant Munjal, Spectramind CEO Raman Roy and Wipro Infotech president Sunil Vaswani.

CIIs package of the measures to encourage the sector were based on the tremendous potential that it offers in terms of employment, especially for women, as well as foreign exchange earnings for the country. The regulatory, infrastructural and procedural issues, which are critical to encouraging the growth of the sector, according to CII include:

• The need to appoint a single, national-level licensing and monitoring authority for the ITeS industry that can provide approvals for multi-facility operations all at once.
• Provision for sharing of bandwidth within same entities and group companies in India.
• Approval for each new customer with DoT to be removed.
• Allowing Internet and international private-leased circuit (IPLC) connectivity on the same LAN.
• Removal of bandwidth licenses.
• Declare ITeS as an ISP and allow owning their satellite gateways.
• Introduce option to buy and sell reserve bandwidth.
• Need to categorise ITeS as a special service under labour laws to allow 24X7 operations, including night and shift operations.

The need for a single, national-level licensing and monitoring authority stems from the fact that currently, for start-up organisations in ITeS, the application for license has to be made to multiple authorities. The provision for sharing of bandwidth within same entities and group companies in India, allowing Internet and IPLC connectivity on same LAN, and declaring ITeS as an ISP to allow them to own their satellite gateways, will solve many of the infrastructure-related problems that the sector faces today.

A procedural bottleneck that companies in the ITeS sector face relates to taking DoT approval for signing each and every new customer, which leads to unnecessary delays and restricts organisations in signing new customers. CII has recommended that approvals from DoT should not be customer specific and may be specific to point of presence (PoP) at the place of termination.

A unique problem that the sector faces and which relates to a fundamental characteristic of the industry is that of providing service seven days a week, 24 hours a day therefore the need for employees to work round the clock. Currently, labour law restrictions, especially for women employees, and inconsistencies across various states have lead to inefficient utilisation of capacity, CII said.

The direct tax issues for the sector, which need to be resolved, include provisions in the Income Tax Act for corporate restructuring, transfer pricing, copyright and royalty-related issues and tax deducted at source on salary for employees in a company engaged in ITeS.

Sections 10A and 10B of the Income Tax Act provide a 10-year tax-holiday to any industrial undertaking in free trade zones (FTZs) for the manufacture of "any article, thing or computer software for export purposes." Sub-section 9 of Section 10A and 10B denies the benefit of Section 10A to an undertaking, where there is a change in ownership of beneficial interest in the undertaking.

If the eligible undertaking is held by a closely-held company and if such a company is acquired by another widely-held company, the benefit under Section 10A in respect of the undertaking will not be available. To enable ITeS companies to engage in genuine restructuring and reorganisation, CII is of the opinion that Sub-section 9 of Section 10A and 10B should be withdrawn with retrospective effect.

To encourage the growth of the ITeS sector, many of the provisions under transfer pricing rules and regulations including flexibility in determining the arms length price in an international transaction and the penal provisions affect need to be reviewed.

On royalty related issues, CII has stressed the need for necessary clarification by CBDT, to the effect that license payments made for the use of software, for the payers own operation, being payments for use of copyright article, are outside the ambit of royalty definition.

On TDS, the current requirement to claim back excess tax withholding, by way of refund claims, leads to significant cash flow constraints for employees, since refunds generally take two to three years after the initial tax deductions. CII has asked for a clarification to be issued to permit employers to consider credit for foreign taxes, in determining taxes to be withholding from the employees salary in India.

The Finance Act 2001 levied a 5-per cent service tax on the value of taxable services provided to a subscriber by the telegraph authority in relation to a leased circuit. Effective 16 July 2001, a 5-per cent service tax is leviable on connectivity charges paid in respect of leased circuits. CII argues that the levy was pushing up the cost of connectivity charges, which are anyway higher than the international rates, adding to a competitive disadvantage.