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Tax authorities here are taking a position that software payments from the country to the US are taxable as "royalty."

New Delhi , Aug. 29

THE Finance Ministry-appointed `Task Force on Emerging Issues in Non-Resident Taxation' would soon recommend the manner in which various software payments made from the country to parties abroad should be treated for tax purposes.

The tax treatment spelt out by the task force would be the guiding principle for the actions of the Income-Tax Department, Finance Ministry officials said. Besides classification of income on software payments, the task force is also looking at taxation issues relating to business process outsourcing (BPO).

In the absence of specific description of the tax treatment of software payments under the Indo-US tax treaty, tax authorities here are taking a position that software payments from the country to the US are taxable as "royalty".

They argue that software payments are for the use of or the right to use any copyright of a `scientific work'; design or model plan, secret formula or process and therefore such transactions should be taxable as royalty.

Indian treaties with Russia, Turkmenistan, Morocco and Trinidad and Tobago (executed after Indo-US Treaty) specifically regard payments for the "use of or the right to use" computer software as royalty.

"The task force will in the not too distant future form a standard opinion on software and other issues referred to it," Mr Vijay Mathur, Director-General of Income Tax (International Taxation), said at an interactive session on Indo-US Tax Treaty organised by the Indo-American Chamber of Commerce (IACC).

While a section of tax experts, citing OECD commentaries, argue that there was no ground for taxing software transactions as "royalty", Mr A.J. Majumdar, Joint Secretary, Finance Ministry, said the department has the right to have its own views and that it was not necessary for Indian position to conform to the OECD view on this matter.

He also held that India is not the only country that is having a different view to that of the OECD position.

On submissions made by Indian industry that the taxation system of the country should not "frustrate" their growth, Mr Majumdar held that the tax department was only trying to get "fair share" of the revenues emanating from India, which is the source country.

The IACC President, Mr Vinod Chandiok, urged the Finance Ministry to give guidance on taxability of different payments abroad so that there is no short deduction of tax at source.

"It's not anybody's case to make short deduction of tax. But you must appreciate that once payments are made; it would be difficult later to recover any short deduction. The department should in a question answer format spell out the positions to help assesses in correct classification of income and proper tax deduction," he said.

He also said that the Indian taxation system should enable Indian companies to go global and not adversely impact their cost competitiveness in international markets.

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