Budget 2025: Tech sector seeks tax reforms, measures to boost R&D

India’s technology industry, valued at over $250 billion-plus, is hopeful that the upcoming Union Budget will introduce essential tax reforms and announce measures to boost investments in research and development (R&D).

The existing tax framework around safe harbour clause, transfer pricing, and advance pricing agreement, among others, has been a major concern for India’s technology industry.

In its Budget recommendations, industry body Nasscom highlighted the role of global capability centres (GCCs) in India’s technology sector.

“They are now innovation centres rather than multi-functional support centres. Since GCCs provide services to their overseas group companies and operate on an operating cost-plus mark-up model, a favourable transfer pricing regime is a key consideration in their growth strategy,” it said.

Nasscom highlighted that the finance minister made an announcement in Budget 2024 to expand the scope of safe harbour rules and streamline transfer pricing assessment procedures.

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The safe harbour rules is a framework where the authorities accept the taxation declared by the companies. As of now, there are numerous regulations which govern this framework, which only increases the paperwork and compliances for the companies. Transfer pricing is the value which is ascribed between two parties and this has been a bone of contention between tax authorities and companies especially the GCC, who are foreign owned.

At present, companies that stand to benefit from safe harbour rules are those with a turnover of Rs 200 crore and below. This is a low threshold for the majority of the companies.

Nasscom has recommended that the safe harbour regime (SHR) should be made available for all related party entities.

“Given the competitive nature of industry, rate of profit margins are not observed to be higher merely because a company is bigger in terms of annual revenues. Therefore, abolish or significantly increase the eligibility threshold for SHR,” it noted.

The other big challenge for the industry has been the enormous amount of time taken in arriving at a resolution in various tax disputes.

“There is a need to alleviate backlog of appeals pending with the appellate authorities for a long period of time. As in the case of Dispute Resolution Panel, the Finance Minister should introduce mandatory timelines for the disposal of appeals by Joint CIT/ CIT (Appeals). This would reduce uncertainty for businesses and also help the government unlock huge amounts locked up in tax litigation,” said Himanshu Parekh, Partner, Tax, KPMG in India.

The industry has also sought certain reforms in the regulations concerning special economic zones (SEZs), which they believe will bring in further investments.

Also, given the broad changes that are taking place within the technology industry, there have been suggestions towards encouraging R&D investments.

“We strongly believe that the government’s sustained emphasis on incentivising investments in R&D and creating a conducive ecosystem for technology-led advancements can unlock immense potential for engineering services firms,” said Amit Chadha, Managing Director, L&T Technology Services. “Such initiatives will not only strengthen India’s standing as a preferred destination for global ER&D but also catalyze economic growth by delivering value across sectors like manufacturing, energy, and mobility.”

The focus on R&D can also be achieved by fostering the deeptech startup ecosystem in India. These deeptech startups have the potential to be technology disruptors in ways that would not be possible by large companies.

Nasscom has said that deeptech startups represent a new frontier in innovation, leveraging advances in science and engineering to solve complex, real-world problems. These ventures span technologies like artificial Intelligence, internet of things, blockchain, quantum computing, advanced materials, biotechnology, etc.

There is a suggestion that the government should create a dedicated DeepTech fund (in the form of Fund of Funds) structured with flexibility for longer gestation (10 years with extensions). The fund’s structure may incorporate provisions for matching capital to encourage greater venture investment in the sector.

As Parekh of KPMG in India notes, “Enhancing R&D incentives through weighted deductions is anticipated to encourage innovation and investment in research, thereby driving growth in the technology sector. These measures are expected to create a more favorable environment for startups and tech companies, fostering innovation and growth in the economy.”