Budget wishlist Nasscom calls for cloud tax clarity ESOP tax deferment for more startups

New Delhi, Jan 22 (PTI) Industry body Nasscom hopes that the Union Budget will extend Employee Stock Option Plan (ESOP) tax deferment to more startups and bring suitable clarifications to address concerns around the tax treatment of foreign cloud use of Indian data centres.
     The association - whose members include IT companies and tech players across-the-spectrum, of varying size and scale - wants the Budget to clarify that procuring hosting or co-location services from an Indian data centre operator would not create a business connection or permanent establishment for the foreign cloud service provider, as the arm's length payments to the Indian player fully cover India-based functions.
     ESOP tax deferral for more start-ups is another proposal highlighted by Nasscom in its Budget push, as is the extension of the carry-forward and set-off of accumulated losses and unabsorbed depreciation benefits in case of amalgamation or merger to all companies (irrespective of their business nature).
     Other suggestions include expanding the eligible utilisation of SEZ Reinvestment Reserve to include leased tech assets, cloud infrastructure, software subscriptions, interiors, facilities, and new-hire/training expenditure supporting authorised SEZ operations.
     Nasscom Vice President of Public Policy, Ashish Aggarwal, told PTI in an interview that the Union Budget comes at an "interesting" and "challenging" time for the industry.
     "As an industry, we closed last year at USD 280 billion, and this year we are closer to USD 300 billion mark but it has been a slow growth over the last few years, and that combined with the global challenges in terms of our key markets... is a context to keep in mind as we think of our tax policies," Aggarwal noted.
     That said, Aggarwal pointed out, new opportunities are opening up with the advent of AI, as well as a strong pickup in the domestic market. The domestic market segment, though smaller in size compared to exports, is growing at a faster pace viz exports, he said.
     "Given this context, it is interesting to look at what we can enable as an industry, and the government can enable through the tax policy regime," he said.
     Nasscom has urged the government to extend ESOP tax deferment to all DPIIT-recognised startups and allow ESOP cost deduction under Section 37.
     India has more than 1,59,000 startups recognised by the Department for Promotion of Industry and Internal Trade. Fewer than 4,000 of these have Inter-Ministerial Board certification; yet this certification is a precondition for qualifying for the 2020 employee stock option tax deferment window, as per Nasscom's recommendations for the Budget.
     ESOPs enable startups to attract high-quality talent, and enabling all DPIIT-recognised startups to benefit from the relaxation introduced in 2020 will make the regime meaningful to startups and enable them to compete with larger, more established businesses to meet their talent requirements, the association said in its pre-Budget memorandum.
     Nasscom also observed that India's data centre sector drives digital and AI growth, offering hosting services to global cloud providers on arm's-length terms.
     The data-centre operator alone performs infrastructure activities and employs local staff, while the cloud provider neither controls the premises nor conducts its business from the facility; it only interacts remotely with servers as part of a global cloud system.
     Nasscom is seeking clarification in the Income Tax (IT) Act that procuring hosting or colocation services from an Indian data centre operator would not create a business connection or permanent establishment for the foreign cloud service provider, as the arm's length remuneration to the Indian operator reflects the India-based functions.
     For IT/ITeS and e-commerce companies where cash flows drive high-volume operations, vendor payments, cloud infrastructure costs, and global delivery centres, Nasscom is of the opinion that the requirement to deposit 20 per cent of a disputed tax demand to obtain a stay during appeals creates severe working capital strain and disrupts business continuity.
     Hence, the pre-deposit limit for stay of demand at the CIT(A) or ITAT level should be reduced to 10 per cent of the disputed amount, Nasscom said, adding that a cap on the maximum pre-deposit amount should be specified, in line with GST laws.
     "So in GST, the government reduced the pre-deposit amount from 20 per cent to 10 per cent. This is the amount you need to deposit when your case is on appeal. Now, under income tax, this is still 20 per cent, so reducing that unclogs working capital," he said.
     Nasscom is also batting for clarification to prevent tax refunds from being adjusted against stayed demands, freeing up working capital for tech firms and avoiding liquidity strain amid disputes.
     "Today, refunds can be adjusted against tax demands, which is fair. But what is happening is that there are tax demands which are stayed. So a refund should not be adjusted against those demands... But because in the tax administration, that clarity is not there so even though a demand has been stayed, it is used to adjust the refunds," Aggarwal said.
     The Income Tax Act allows for the carry-forward of business losses and accumulated depreciation in the case of amalgamation of certain categories of entities (that is, those owning an industrial undertaking, banking companies, etc.). In such cases, the accumulated loss and unabsorbed depreciation of the amalgamating entity is deemed to be the loss of the amalgamated company. However, companies in the services sector are not eligible for such benefits.
     Nasscom is pushing for the carry-forward of business losses and accumulated depreciation to all companies under the IT Act.
     "In mergers and acquisition, the way the industrial undertaking is defined, set off and carry forward of losses during this merger stage is not permitted for the service industry. Now, given the trends in our industry where we are seeing a lot more mergers and acquisitions happening, I think this is again an easy fix that can be taken up by the government," he said.

(This story has not been edited by THE WEEK and is auto-generated from PTI)