Tax Authority turns gaze on software industry

Author: | Published: 1 Aug 2012
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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 companies.

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 payment.

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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