Press Release, dated 30-7-2012

What this is

Press Release, dated 30-7-2012 was issued by the Central Board of Direct Taxes on 30 July 2012. Its subject is Prime Minister sets up Committee to Review Taxation of Development Centres and the IT Sector - Safe Harbour Provisions to be Finalised soon.

What it does

Announces a committee set up by the Prime Minister on the taxation of development centres and the information technology sector, chaired by Shri N. Rangachary, former Chairman of the Board and of the insurance regulator, with the Director General (International Taxation) and the Director of Income-tax (Transfer Pricing) as members and power in the Chairman to co-opt other officers. Its terms of reference are to consult stakeholders and other departments and settle the approach to taxing development centres and suggest any circulars needed; to hold sector-wide consultations and finalise, sector by sector, the safe harbour provisions announced in the Budget of 2010, again suggesting circulars; and to examine issues in the taxation of the information technology sector and suggest clarifications. The timetable set is the approach to development centres and clarifications on the sector by 31 August 2012, draft safe harbour provisions for three sectors or sub-activities each month starting 30 September 2012, and all safe harbour provisions finalised by 31 December 2012.

Why it was issued

The general anti-avoidance rule committee already set up under Dr. Partho Shome did not reach these questions, and issues remained on the approach to taxing development centres, the treatment of onsite services of domestic software firms, and the safe harbour provisions announced in the Budget of 2010 which had never been made operational.

Who it reaches

• Captive development centres of multinational groups in India
• Domestic software firms providing onsite services abroad
• Taxpayers awaiting safe harbour rules in transfer pricing
• Transfer pricing officers dealing with captive service providers

The instrument, as the Board published it

Prime Minister sets up Committee to Review Taxation of Development Centres and the IT Sector - Safe Harbour Provisions to be Finalised soon
Press Release, dated 30-7-2012
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.
2. The Prime Minister had earlier set up an Expert Committee on GAAR under the Chairmanship of Dr. Partho Shome to engage in a widespread consultation process and finalise the GAAR Guidelines. The response has been overwhelmingly positive.
3. 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 the 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.
4. Many MNCs carry out activities such as product development, analytical work, software development, etc. through captive entities in India. They exist in a wide range of fields including IT software, IT hardware, Pharmaceutical R&D, other automobile R&D and scientific R&D. These are popularly called Development Centres. Over 750 MNCs have such centres at over 1100 locations in India. The reason for this large concentration of Development Centres in India is the worldwide recognition of India as a place for cost competitive, high quality knowledge related work. Such Development Centres provide high quality jobs to our scientists, and indeed 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.
5. As far as Safe Harbor provisions are concerned, these were announced in Finance Bill 2010 but have yet to be operationalised with a wide application. Safe Harbour provisions have the advantage of being a good risk mitigation measure, provide certainty to the taxpayer.
6. The resolution of the above tax issues requires a comprehensive approach in which other government departments are consulted and industry bodies are taken on board. The overall goal is to have a fair tax system in line with best international practice which will promote India's software industry and promote India as a destination for investment and for establishment of Development Centres. Therefore, the Prime Minister has constituted a Committee consisting of experts from the Income Tax Department, both serving and retired, who will examine the issues in detail and submit proposals in a short time. An arm's length exercise of this nature will allay a lot of concerns in addition to the immediate resolution of issues that is necessary.
7. For this purpose, a Committee on Taxation of Development Centres and the IT sector has been constituted consisting of:

1. Shri N. Rangachary, former Chairman CBDT & IRDA
- Chairman

2. Ms. Anita Kapur, Director General (IT)
- Member

3. Ms. Rashmi Sahani Saxena, DIT (TP)
- Member

4. Any other officer from the Income Tax Department to be co-opted by the Chairman

8. The Terms of Reference of the Committee will be to:
(i) Engage in consultations with stakeholders and related government departments to finalise the approach to Taxation of Development Centres and suggest any circulars that need to be issued.
(ii) Engage in sector-wide consultations and finalise the Safe Harbour provisions announced in Budget 2010 sector-by-sector. The Committee will also suggest any necessary circulars that may need to be issued.
(iii) Examine issues relating to taxation of the IT sector and suggest any clarifications that may be required.
9. The Committee will work to the following time schedule:
(i) Finalise the approach to taxation of Development Centres and suggest any necessary clarifications by 31 August 2012.
(ii) Suggest any necessary clarifications that may be needed to remove ambiguity and improve clarity on taxation of the IT Sector by 31 August 2012.
(iii) Finalise Safe Harbour Rules individually sector-by-sector in a staggered manner and submitting draft Safe Harbour provisions for three sectors/sub-activities each month beginning with the first set of suggestions by 30 September 2012. All Safe Harbour provisions can be finalised by 31 December 2012.
10. The Department of Revenue will provide all necessary support to the Committee to facilitate its work including office assistance and assistance to facilitate consultations.
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What to watch

• Nothing here changes the law - it announces a committee and a timetable, and the safe harbour provisions were still to be made.
• The release records that safe harbour was announced in the Budget of 2010 but had not been operationalised with wide application, so no relief could be claimed on the announcement alone.
• The dates given are targets for the committee's work, not dates from which anything applies to a taxpayer.

Where you meet it

Only as background to how the safe harbour rules and the guidance on captive development centres came about.

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