In a bid to further clarify the confusions related to the Indian taxation policies, the Indian Prime Minister, Manmohan Singh, has set up a review committee to examine the taxation of Development Centers and the IT Sector.

A statement issued from the Prime Minister's office said that the committee of experts will "finalize the Safe Harbor provisions" and suggest an approach to the taxation of Development Centers after holding consultations with the stakeholders and the related government departments.

This committee is the second such attempt by Singh who also holds the finance portfolio. He had earlier set up a committee on the General Anti Avoidance Rules (GAAR) to engage in a widespread consultation process and finalize the GAAR Guidelines by the end of September 2012.  

"While this committee would address concerns on GAAR provisions and would reassure investors about the predictability and fairness of our tax regime, it was felt that there is still a need to address some other issues relating to the taxation of the IT Sector such as the approach to taxation of Development Centres, tax treatment of "onsite services" of domestic software firms, and also the issue of finalizing the Safe Harbor provisions announced in Budget 2010," the statement said.

The government feels there is a need for clarity on taxation issues if the country has to promote the Development Centers in a highly competitive field.

"Over 750 MNCs have such centres at over 1100 locations in India. The reason for this large concentration of Development Centers in India is the worldwide recognition of India as a place for cost competitive, high quality knowledge related work. Such Development Centers provide high quality jobs to our scientists, and indeed make India a global hub for such Knowledge Centers. However, India does not have a monopoly on Development Centers."

The Safe Harbor provisions were announced in the Finance Bill 2010 but have yet to be implemented with a wide application. The Safe Harbor provisions have the advantage of being a good risk mitigation measure and provide security to the taxpayer, said the statement.

The committee, headed by N. Rangachary, former Chairman of the Central Board Of Direct Taxes (CBDT) and the Insurance Regulatory And Development Authority (IRDA), will work on a time-bound schedule. The committee will finalize the approach to the taxation of the Development Centers and the IT sector and suggest any necessary clarifications needed to remove ambiguity by Aug. 31, 2012. 

The deadline for submitting the draft of the Safe Harbor provisions for the three sectors/sub-activities each month begins with the first set of suggestions by 30 September 2012. All Safe Harbor provisions can be finalized by Dec. 31, 2012.