Likely impact of Single Transaction Tax on IT Industry of India

Likely impact of Single Transaction Tax on IT Industry of India
Atal Bihari Bhanja, FCA, DITL (ICAI)

Introduction & Impact
Recently introduced Single Transaction Tax concept by ARTHAKRANTI PRATISHTHAN, a Pune based research organization has created a lot of interest among the industry and political circle with expectation that newly formed central government may adopt this concept for creating a vibrant Indian Economy. It is expected that, the central government may introduced this concept in 2-3 years down the line once the blue print is conceptualized. It is intention of this article to analyze the real impact shall be caused by this taxation system on the India’s core growth driver IT industry which is again fragmented into IT Software, IT Hardware and IT Enabled Services industries. This is an independent analysis without having any political alignment with any parties.
Salient Features of the Single Transaction Tax System (STT) as per ARTHAKRANTI and their impact on these three sectors of IT industry are given below -
Features of STT    Impact on IT Hardware Industry    Impact on IT Software Industry    Impact on ITES Industry
Abolition of all Taxes like Income Tax, VAT, Service Tax, Excise, LBT, Octroi excluding Customs and Import Duties.    Ø Compliances will get reduced.
Ø Competitiveness of domestic products will increase in comparison to imports because of reduction in Income Tax rate and continuance of levy of Import duties on fully assembled products.
Ø Bartering Trade may increase to reduce bank transactions.
Ø Even loss making companies need to pay STT on all their collections. STT proposal says this tax can be passed on to the ultimate customers, which again shall cause downfall in demand.
Ø Benefits to Indian Assemblers rather than importers of fully assembled products.
Ø Benefits to Indian manufacturers of other IT hardware products than importers.    Ø  Compliances will get reduced.
Ø Majority Software industries are enjoying Tax Holiday periods. Hence, no impact on their income.
Ø  Already exports of IT software are exempt from VAT and Service Tax. Hence, no impact.
Ø  Importers of IT Software may be hit with import duties.
     Ø Compliances will get reduced.
Ø No impact on Services Exporters.
Ø Gain to companies who cater to domestic clients because of abolishment of Service Tax.
 
Single Point Transaction Tax @ 2% shall be levied on all Bank Transactions.    Since profit margin is less for hardware industry, STT will eat away total profit as it will be 2% of gross turnover transacted through banks.    Software industry doing exports shall be severely hit for export collections which otherwise are tax free now.    Services exporters shall be severely hit for export collections which otherwise are tax free now.
 
Withdrawal of High Denomination currencies (above Rs. 50/-).    May be hardware purchases slow down as business from walk in customers shall get reduced.    Retail Sale of software may be affected.    No Impact.
Cash Transactions above Rs. 2000/- shall not get legal protection.    May be hardware purchases slow down as business from walk in customers shall get reduced.     Retail Sale of software may be affected. What will happen to the IPR protection provisions for customers who purchase software products by paying cash? If no legal protection is given to such customers, then IT Software companies shall be benefited by treating these customers violating IPR laws.    No Impact
Social Security benefits of Rs. 1500/- to old citizens below poverty line after abolishing many non-merit subsidy schemes.    No major Impacts.    No Impacts.    No major Impacts.
Sharing 0.35% of total collections of STT to the Banks.    Since the sharing formulae suggested is to be applied universally across all transactions, no sectoral impacts. However, due to high income, Banks may opt for modernisation, new hardware acquisition, software up gradation and appoint more ITES providers. Although, rationally it is not understandable why Banks should be rewarded handsomely without any efforts, higher disposable income at their hand shall cause growth of IT industry as a whole.
Sharing of total collections of STT @ 0.7 % to Central Government, 0.60% to State Government and 0.35% to Local Governing Bodies.   
Giving Full salary up to retirement and all retirement benefits to the retrenched Government employees working in various tax collection departments.    Why the surplus staff of Tax Collection Departments should be offered voluntary retirements and full salary for life and retirement benefits? Instead they should be deputed to other departments and engaged in productive works.
Audit of all Bank Transactions to ensure filtering of Income Transactions. (This is necessary for filtering taxable income transactions    If the Banks pay audit fees from their tax sharing income, it is good. Otherwise, it will be additional compliance and financial burden on all citizens.

OTHER ADVANTAGES & DISADAVANTGES
1.    Clarity not been available in Arthakranti proposal for whether non-income transactions like maturity of FDs, contra entries, reversal entries, accommodation entries, Investment proceedings, capital infusion & loan inflow etc. shall be taxable or not. Hence, it is necessary to amend the proposal suitably for filtering of bank deposit transactions.
2.    The biggest advantages accruing to the industry is abolishment of departmental harassment and efforts made in doing hard core tax planning exercises.
3.    It is also not clarified whether international and domestic transfer pricing regulations of the Income Tax Act shall also be nullified or not. As these are special investigation of related party transactions and an additional burden on IT industry specifically.
4.    Whereas IT companies will be benefited on profiteering of banking industry, they will lose business from hard hit insurance companies due to abolishment Section 80C / 80D of Income Tax Act and introduction of Social Security Systems. So, net impact on growth of business from these two vital sectors shall be neutralized. Government may merge bot Banking and Insurance sectors as consolidation strategy.
5.    SME sectors and entrepreneurs shall be hard hit as they earn hardly any profit at least in the beginning phases.
6.    Employees whereas, on one hand will lose income slab based exemption / reduced tax rate benefits, on the other hand, they will be taxed at @2% only and get rid of taxes on perquisites. Low salary employees shall be hit.

Sectoral Strategy for IT Industry
§ Instead of cash bonus, issue more ESOPs and other benefits / perquisites to the employees.
§ Ask the Government for abolishing transfer pricing regulations for international as well as domestic transactions.
§ Since IT industry is becoming the major employment generator, government should be asked to give large infrastructural facilities to the sector.
§ Pursue the Banks to go for expansion by opening more branches and modernization drive by upgrading hardware & software facilities. Banking industry should also be solicited for assigning works to ITES industries.
§ Subject to foreign exchange regulations, IT industries may opt for diversification abroad by parking their export earnings in foreign countries.

§ Continue discussions and derive flexible strategies to take benefits out of the new transaction tax system if at all to be introduced keeping aside the much debated and awaited GST laws.