ISPs may have to pay a service tax after budget
IN AN unpopular move sure to dampen spirits in the IT industry, the government plans to bring internet service providers (ISPs) under the service tax net and cut down the benefits available to software exporters under Section 80 HHE of the Income-tax Act. The decision to bring software exports under the income tax net is part of a larger move to tax exports, sources told G Ganapathy Subramaniam. Since the government is keen to step up revenue generation from service tax, the move to tax ISPs has become inevitable, the sources said.
The 5 per cent service tax on ISPs, likely to be part of the '00-01 Budget, will put an additional burden on the 6.5 lakh internet subscribers across the country. ISPs like Mantra Online, Dishnet, Satyam, Ernet, Pacific Internet, MTNL and VSNL may not feel the pinch since the burden of service tax is usually passed on to consumers as in the case of telephones.
The net effect of the move would be to push up the cost of internet access that has been falling. In case of software exports, the government initially discussed the idea of imposing MAT (minimum alternate tax) on exports, putting a 11.55 per cent burden on companies. However after lengthy discussions the finance ministry, it was decided that diluting the benefits available under Section 80 HHC and HHE was a better option, sources said. The provisions granting exemptions under the Section would be tightened to ensure revenue generation.
The argument in favour of taxing exports is that this sector was doing well enough to bear the impost. The case of top software companies, which are ruling the stock markets on account of phenomenal earnings, has been cited as an example. FM Yashwant Sinha has already hinted at a "harsh" budget. Since the country's foreign exchange reserves are comfortable and exports are growing at a healthy pace, it is felt that the impact of the move would be absorbed.
The industry however is unlikely to buy the argument. The bid to bring ISPs under the service tax net would be a retrograde step, said Nasscom's Dewang Mehta. "We will oppose it tooth and nail. Any move that results in increasing cost of internet access is unwelcome," he said. The government should actually reduce internet cost, he added.
The government probably feels the software industry has matured, said KR Girish, partner at Bharat S Raut & Co. Since there is no fear of depleting forex reserves, the move may not result in an adverse impact on the country's balance of payments (BoP) position, he said. "Sops were given initially to boost the industry. At some stage, the government will think of taxing it to improve the revenue position."
Any bid to impose service tax on ISPs would result in procedural problems, said S Madhavan, executive director at PriceWaterhouseCoopers. While the recipients of the service and the ISP companies concerned are located in India, the servers used by them are located elsewhere, mostly in US. Since modalities are complex, even US and European countries do not tax ISPs, he said.
The counter-argument is that it is easy to tax ISPs since there is a specific database and administration would be the responsibility of the service providers. The additional impost would be straight away billed to the customer like in the case of MTNL telephone bills, sources said.
Taxing the IT industry is not the right solution, KN Memani of Ernst & Young said. This sector, which has turned out to be India's strength, should be allowed to grow rapidly. In fact, the government should not tax exports at all as the country still suffers from trade deficits very year. We should create trade surpluses out of huge growth in exports, he said, adding the country's forex reserves are not strong enough.
-Economic Times |
