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Richa Mishra

New Delhi , Sept. 18

TO give the right push to Indian software exports to Japan, India Inc has urged the Centre to take up the problems it faces with the Japanese authorities.

These are regarding the intricate tax structure that the industry is forced to face. "It is important that tax laws and tax treaty be fine-tuned," says the Federation of Indian Chambers of Commerce and Industry (FICCI).

Outlining the problems faced due to levy of withholding tax by the Japanese Government on software development undertaken by Indian companies as per the provisions of Double Taxation Avoidance Treaty between the two countries, a FICCI official said, "Article 12 of the Treaty provides that a country where a payer resides is able to tax the fees for technical services provided as per domestic tax codes."

Elaborating further, the official told Business Line, "As per this stipulation, the Japanese Government can tax the fees for software development by India in the form of withholding tax. Currently, India exempts software developers from any tax liability. However, due to the tax treaty, Indian software developers are not being compensated for their tax liability paid to Japanese authorities from the Indian Government by way of tax deductions."

As a result, Japanese buyers who are often under the obligation of net income guarantee as fee on the services rendered are liable to tax at the rate of 20 per cent on the same. Due to imposition of such tax, the software cost would increase by approximately 25 per cent. "An imbalance exists in the tax treaty. In India, income tax is collected on the basis of the tax treaty and as per domestic laws," the Chamber said.

When Japanese demand for Indian software is very strong, Japanese buyers may absorb the burden of tax liability, FICCI said. However, if this situation continues, there is a possibility that Japanese buyers may move towards other countries where there is no such unusual tax burden.

In a letter written to the Finance Secretary, Mr D.C. Gupta, the Chamber has stated, " The Government may consider taking `software development' outside the purview of the tax treaty." The fundamental way is to transform the current unique tax treaty into one which admits no such controversial tax on the fees for technical services, the Chamber pointed out.

The other practical solution to the problem could be that only Japanese domestic tax code may be revised with a view to exempting the tax on the payment made by Japanese companies while leaving Indian taxation as it is, the Chamber said. "The Government may also consider introducing the concept of deferred tax credit concept in such cases."

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