NEW DELHI: Intense lobbying by US multinational software firms notwithstanding, the government is unwilling to roll back its proposal to categorise the sale of software as royalty, as the double taxation avoidance agreement between India and the US allows India to tax the sale of software as royalty.
Finance ministry officials said India had told both the US and the Organisation for Economic Co-operation and Development software sales always came under royalty according to Indian tax laws, and any change in the Budget tax proposal now would mean going back on that statement.
Finance Minister Pranab Mukherjee, in the US to attend the International Monetary Fund-World Bank meeting, told US Treasury Secretary Timothy Geithner that in the past, both the US and India had agreed to disagree on the categorisation of software sales as royalties.
“The concept of royalty is different in the domestic law of the US. Under the mutual assessment process, it was agreed India would tax income from the sale of software as royalty and the US would give relief from double taxation….An amendment in the law has been proposed to clarify that royalty always included the sale of software,” said a finance ministry official.
In the Finance Bill 2012, the government had proposed to amend Section 9(1)(vi) to clarify the consideration for use or right to use of computer software was royalty. The amendment was proposed retrospectively from 1976 and this created furore among information technology companies selling software in India.
“Software companies, like any other sector, look for continuity in policy. If laws and rules are amended with retrospective effect, it becomes difficult for companies to operate. Planning becomes difficult for these. It’s a genuine concern and the government should look into it,” said Ganesh Natarajan, chief executive, Zensar Technologies.
As these companies do not have permanent establishments in India, the income accruing to these from the sale of software as goods is treated as business income and taxed in their home country. By categorising it as royalty, the income tax department can stake a tax claim on the income from sale of software.
The official said the confusion over categorisation of software sale emerged in 2005 when OECD, a group of developed nations, changed its commentary with regard to ‘use’ or ‘right to use’ of software. After this some software companies approached the Income Tax Tribunal but the verdict came in favour of the government. Thereafter, many companies moved courts and some judicial decisions interpreted it in a manner that raised doubts whether payment for use of computer software is royalty or not.
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