The Government of India's (GOI's) initiative, earlier this
year, in overturning the Supreme Court of India's judgment on
the issue of retrospective tax amendments, has not been
confined to offshore transactions. In the 2012 Union Budget
proposal, the finance minister also proposed to 'clarify' tax
law retrospectively [to 1976] on the sale of packaged software.
While it hopes that this will result in extra tax payments,
some legal commentators fear that the decision might lead to a
fall in investment from the world's leading software
The clarification stated that the sale of packaged software
involves copyright content. Income derived from such products
should thus be treated as royalties and be taxed accordingly.
This implied that all sales activities of packaged software
that took place after 1976 will incur additional tax
Ernst & Young tax and regulatory services partner Rojan
Vora says: "When producers sell their packaged software to
consumers, there is an assumption that what they are selling is
the product instead of the transfer of copyright. This
assumption is natural and fully understandable."
He adds: "Suddenly, such an assumption is being challenged
and sellers are requested to pay whatever the government asks
them to pay according to the government's interpretation. There
is no respect for the mutual agreement between investors and
the state. For investors, this is a truly worrying signal."
The amendment has triggered lobbying activities among global
software companies. For example, Microsoft, Oracle and Adobe
formed a software coalition group that enlisted Baker &
McKenzie to write a lobbying letter to the GOI on April 19
2012. The letter stated that the "unilateral shift" by the Tax
Authority would create "very significant conflicts in the legal
treatment of cross border software transactions between India
and its trading partners". It also warned that if the tax
changes are implemented, software companies may reduce the
amount of capital they are willing to invest in India.
The companies most likely to be affected by the amendment
include Microsoft, General Electric, Hewlett-Packard, Samsung
and Sonata Software.
In late March, Microsoft said it would comply with the GOI's
decision in taxing income from packaged software sales. A
Microsoft spokesperson told Asian business intelligent website,
ZDNet Asia, that the industry was still seeking
clarification on the implications of the tax amendments.
However, many members of the software industry are less than
enthusiastic about the GOI's decision. Prior to submission of
the lobbying letter, there were already a few pending
litigation cases against the Tax Authority in India's High
Court and Supreme Court. While some of these have been turned
down by the courts, others have been accepted.
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