The government has proposed to combine multiple IT service lines into one category with a common threshold safe harbour margin of 15.5% for transactions upto Rs 2,000 crore. Safe harbour rules are in place to facilitate taxability of overseas income. Earlier these rules allowed companies to declare operating margins depending upon the nature of services, typically ranging between 17% and 24% for overseas income up to Rs 300 crore. The latest proposal increases the income limit and sets a uniform operating margin thereby increasing participation of more mid-tier companies, which usually operate at lower margins than the top-rung companies.
The other proposal on the treatment of profit earned through buyback of shares will affect IT companies since they have often used this route in the past to return cash to shareholders. The latest proposal will treat the profit from buyback activity as capital gains compared with the previous treatment as deemed dividend, which was taxed at the marginal tax rate.
The latest amendment is expected to make buybacks more attractive as the tax outgo becomes more predictable since it will attract a fixed capital gains tax. In addition, corporate promoters will face an effective tax rate of 22% whereas non-corporate promoters will face a 30% rate.
The government has also proposed to grant a 20-year tax holiday up to 2047 to foreign cloud services providers that use Indian datacenters. This is expected to benefit companies such as Tata Consultancy Services and Adani group that have chalked out plans to set up data centre activities in India.
