Tax Relief to Software industry ‎

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pursuant to which tax will no longer be deducted on multi-level software payments made

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to a resident, subject to certain conditions discussed below. The new provision will come

into force from 1 July 2012.

Background & Budget 2012

The Indian tax laws, until recently, were capable of varying interpretations on

characterization of income from software payments in view of the conflicting decisions

of the various courts on whether or not payment for use of software is royalty.

The Finance Act, 2012 clarified the above issues by inserting explanations to section

9(i)(vi) of the Income Tax Act, 1961 (“IT Act”) with retrospective effect from June 1,

1976 stating that the consideration for use or right to use of computer software is royalty.

Although, the Finance Act, 2012 cleared the ambiguities surrounding the characterization

of software payments, under the extant provisions, withholding tax on royalty payments

is applicable at the rate of 10% without any exceptions. In case of multi level software

distribution, this would mean that the withholding tax would be applicable at every level

of the software distribution chain for e.g from a non-resident software owner to a

resident distributor, from a resident distributor to the resident retailer and finally to the

end consumer, resulting in multi-level taxation on such payments.

The Government has pursuant to the powers given under section 197A (IF) notified that

tax is not required to be deducted at each level for acquisition of software if the

stipulated conditions are complied with.