Software services may be taxed

A draft circular classifying payment for software services is expected to be formulated by the Central Board of Direct Taxes (CBDT) in early November.

The board is currently evaluating the recommendation of the Emerging Issues Task Force's (ETIF) report on whether to treat such payments as royalty or not.

A J Majumdar, joint secretary, CBDT said at the Southern Regional International Tax Conference of the Bangalore Chamber of Industry and Commerce on Friday that the proposals submitted by ETIF are under consideration. CBDT has debated the issue once and will take a look at it again in early November.

Sources in the know said the proposals have not considered payments for shrink-wrapped software as royalty if there is no right to commercially exploit the software. As a result, the withholding tax (WHT) will not be applicable on payments for software services. They added that this was the OECD (Organisation for Economic Co-operation and Development ) norm.

The proposed CBDT notification comes after the new Indo-Malaysian Tax Treaty that, against industry expectations and OECD norms, has clubbed software services payment under royalty.

Under the treaty, India had also taken a position to bring it under source base taxation. This treaty will not have a major impact immediately as the Malaysian tax laws do not permit WHT. However, repercussions could be serious if the country amends its domestic tax laws, they said.

Majumdar said, India should now take a rational view as it could turn a net technology exporter from being a net importer. Under the present situation, the country can benefit by WHT. However, once the country emerges as a net technology exporter change will be imperative, he said.