The IT Industry and its Contribution.
Indian Information technology (‘IT’) industry contributes 8 per cent of country’s Gross Domestic Product (‘GDP’), the entire revenue from IT in 2022 is 227 billion dollars. As of 2022, the IT industry employs over five million people and is predicted to grow to contribute 10 per cent of GDP by 2025.
The Indian IT industry contributes the majority of service exports; out of overall service exports of 254.4 billion dollars for Fiscal Year (‘FY’) 2022, software exports contributes 171.90 billion dollars, accounting for 68% of total service exports.
Out of total software exports, the United States accounts for 62 per cent of total software exports, while other markets that account for more than 10 per cent of total exports include the United Kingdom and the European Union. These exports will continue to expand as India remains cost-effective for software development. Also, India is in the forefront in terms of digital skilling which according to Amazon Web Services(‘AWS’) survey digital skilled employees at workplace will multiply by nine-fold and India will have 3.9 billion digital skill trainings by 2025. This will further boost the growth of Software Industry. Apart from these the policy support from the Government such as clarifying the definition of intermediary services in Goods and Service Tax Act, 2017 and processing of refund applications on timely manner is helping the global companies to establish their captive and research units in India.
Reasons for IT companies establishing units outside SEZs and STPIs
The withdrawal of a tax incentives, high real estate cost in delineated zones, and the quandary surrounding the implementation of the DESH bill had the impacted these entities starting their operations in the Free Trade Zones (‘FTZ’). However, these IT companies in FTZ failed to comply SOFTEX requirement under the FEMA, which in turn creating a barrier in obtaining GST Refunds.
As per the FEMA the realization of foreign currency in respect of exports made should be within a period of nine months from the date of export.
FEMA Master Directions requires in case of export of software, the value needs to be certified by the STPI Authorities, this applies to non-STPI units as well. Non-STPI units also needs to report these transactions through SOFTEX Forms to the STPI Authorities and therefore all the exports of software required to be reported to STPI Authorities. Failure to file SOFTEX Forms would amount to non-compliance under the FEMA and the software exports would be treated as export of general services by the Authorized Dealer banker.
As most of the entities are of the view that Obtaining import export code (‘IEC’) is mandatory only the entities which are into export/import of goods, they usually do not obtain the IEC, which is a pre-requisite to obtain registration from STPI Authorities, which leads to non-compliance.
Also, while obtaining refunds under the GST for export of services either under route of “Exports with payment of duty” or under the route of “exports without payment of duty”, generally the realization of foreign currency is mandatory requirement for which supporting apart from the FIRC, SOFTEX Forms would also act as supporting evidence to ease the process of obtaining refund under GST.
The Domestic Tariff Area (‘DTA’) units will be required to register with regional STPI under ‘non-STPI category’ and required to submit the SOFTEX Forms on periodical basis. For Registration application required to be submitted online with the requisite fee and usually the same is approved within a period of ten working days. Once the application for the registration approved the same is valid for a period of three years. After the validity of three years the same is required to be renewed.
For filing the SOFTEX Forms and certifying the value of exports the charges are based on the value of the proposed contract these charges required to be discharged to the STPI. SOFTEX Forms are required to be filed within a period of 30 days from the date of invoice. For filing SOFTEX Forms an allotment number required to be obtained from the website of RBI which acts as a linkage between the RBI and Authorized dealers. After obtaining allotment number the SOFTEX based on the allotment number needs to be submitted to the concerned regional STPI. Apart from filing SOFTEX Forms there is a requirement to file Quarterly and Annual performance reports with the STPI Authorities.
Penalty and way forward in case of non-compliance
Non-compliance of these procedures regarding filing of SOFTEX Forms attracts penalty up to three times the amount involved.
Condonation of delay in non-filing of SOFTEX Forms provided by the STPI Authorities, which can be used in case of non-compliance as on date. The regional STPI Authorities provide for condonation of the same and the procedure for condonation shall be filed by a letter of condonation which among the other things requires certifications of exports made the Chartered Accountant and Authorized Dealer Banker regarding exports and receipt of money in foreign exchange.
Notices for non-compliances from STPI Authorities
STPI Authorities started issuing notices for non-compliance with respect to filing of SOFTEX Forms, as these notices are received after a period of two to three years of completion of export transactions, it practically becomes difficult to obtain registration of IEC post receipt of such notices for the earlier periods, thereby complying with such notices is a challenging task.