Finance minister Pranab Mukherjee on Wednesday gave a breather to the $100-billion information technology (IT) industry by clarifying that sale of packaged software in the domestic market won?t be subjected to tax at multiple levels.
Although the circular is yet to be issued, industry experts say this would mean that the 10% tax on the royalty would be deducted only at the level of the master distributor who buys the software from foreign manufacturers and sells the same to smaller dealers. There won’t be another incidence of tax at the downstream including at the stage of final sale to the end consumer.
In the Budget 2012-13, Mukherjee brought a retrospective amendment to tax law overcoming judicial rulings which said that payments towards packaged software by an Indian resident to foreign manufacturer wouldn’t amount to royalty. While this provision would hit the IT industry, the clarification that there won’t be multiple TDS in the domestic distribution chain would bring some solace to the industry.
The decision to avoid multi-level TDS on software royalty was taken on the advice of group formed to resolve the issue in area of transfer pricing and international taxation.
“I have constituted an advisory group to resolve various issues in the area of transfer pricing and international taxation. The group has held its first meeting on May 25. On advise of group and Nasscom, I have approved issuance of a circular to avoid multi-level TDS on software under section 194 J (of the Income Tax Act). This will remove hardship in case of software distributors,” Mukherjee said.
Section 194-J of the I-T Act deals with fees for professional and technical services and covers royalty and non-competence fees. Section 195 deals with purchase of packaged software from foreign companies.
“This move is related to packaged software and means a lot for the software industry which imports as well as develops software in the country which then goes through the distribution chain. Earlier, 10% TDS was charged at every stage of the channel. The costs were rising because the margins are less. Also, software piracy was on the rise because of this,” said Som Mittal, president, Nasscom.
TDS on software was applicable because payments for software was being treated as royalty and every level of the distribution chain- from manufacturer to consumer- was being taxed.