Relief for tech firms as govt sheathes tax sword

Jan 18 2013, 01:07 IST
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SummaryIn a move that would bring relief to Wipro and Infosys and provide clarity on a key tax issue to the Indian software industry at large, the Central Board of Direct Taxes said on Thursday that software developed abroad at a client site will be eligible for tax benefits.

In a move that would bring relief to Wipro and Infosys and provide clarity on a key tax issue to the Indian software industry at large, the Central Board of Direct Taxes (CBDT) said on Thursday that software developed abroad at a client site will be eligible for tax benefits. Also, all such software will be deemed as exports and the profit earned from the deployment of manpower at a client’s overseas site for software development won’t be denied tax benefits under Sections 10A, 10AA and 10B of the Income Tax Act of 1961.

In mid-2012, many software giants including Wipro and Infosys had received I-T notices (aggregating about R600 crore) for claiming tax exemption on onshore services by declaring them software exports. The department's clarification comes at a time a tribunal decision on the dispute is awaited.

The seven clarifications issued by the CBDT in this regard are clearly in conformity with court judgments that in case of bona fide exports, “nature of services” could be liberally defined so as not to deny tax benefits (export incentives). Said Ernst & Young tax partner Rajiv Chug: “There are judicial precedents to the effect that as long as the export claims are certified by the designated authority (the directorate of STP), tax benefits can be given. This will help reduce litigation and is in sync with the judicial precedents on the issue.”

Apex software body Nasscom termed this clarification a “huge relief”.

Sangeeta Gupta, vice-president, Nasscom said: “It will ease the issues in the industry and will enable companies to bring in integrated models. There will be no additional benefit in monetary terms but it has been clarified in favour of the industry which is a huge relief.”

The clarifications come ahead of finance minister P Chidambaram's visit to Hong Kong and Singapore to attract investments. Chidambaram is scheduled to leave on the two-nation tour on the night of January 21. He is also expected to visit Germany and the UK later in the month.

CBDT chairperson Poonam Kishore Saxena said: “These clarifications will address the disputes or concerns of software industry arising out of interpretation of existing provisions of tax structure in the IT Act (with respect to Sections 10A, 10AA and 10B).”

These clarifications, Saxena said, follow the recommendations of the N Rangachary committee constituted by the Prime Minister last year. They should lead to a reduction in disputes between the information technology industry and

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