It’s not Vodafone alone. Many companies in several sectors will bear the brunt of the Budget proposal to amend tax laws with retrospective effect. The information technology industry is learning it the hard way.
The Budget proposal to retrospectively amend ‘royalty’ from 1976 will force many Indian companies to pay tax on past purchases of computer software. Any payment towards packaged software would amount to royalty, according to the amendment.
The IT industry is already embroiled in several instances of litigation with the tax authorities, both in high courts and the Supreme Court, in cases where income from the sale of software or royalty has been taxed. But, with Budget 2012-13 defining ‘royalty’ as any ‘right for use’ or ‘right to use’, a computer software (including granting of a licence), irrespective of the medium through which such right is transferred, a lot changes.
To begin with, this means a massive additional tax burden for firms such as Tata Consultancy Services (TCS), Sonata Software, GE, Wipro, Microsoft and others.
For the moment, companies such as SAP are trying to downplay the issue. Alok Goyal, COO, SAP India, said, “The clarification issued in the current Budget reaffirms the position adopted by SAP around classifying financial transactions and the basis on which tax has been deducted and paid. At SAP, the software transactions between India and our parent company have been classified as royalty for tax purposes for the last many years. This income of SAP AG has been subject to withholding tax at the rates prevalent in the relevant tax treaties. SAP AG offers this income to tax in India and this position has been accepted by the revenue authorities. Therefore, there is no impact on SAP operations,” he said.
Venkatraman N, CFO, Sonata Software, said the issue of whether payment for import of software was in the nature of royalty or not was pending before the Supreme Court. “We have consistently held the liability on this count on us in monetary terms will be marginal as a major part of the tax that would be payable has already been paid by one of our principal vendors,” he said.
Venkatraman explained that until 2001, the tax authorities would treat shrink-wrapped software product as ‘goods’. And accordingly, vendors and sellers were paying local taxes like sales tax, VAT, etc. “But in 2001, I-T officials started making demands on these companies that the payments made by them to their suppliers of shrink-wrapped products was in the form of ‘royalty’ as defined under the Income Tax Act and so was duty-bound to have deducted tax on these payments. They pursued the line of argument that this was not in the nature of purchase of goods and the understanding of the industry was wrong. The companies had already made payments for their purchase and there was no way they could now go back and deduct taxes on their payments in the past. The liability for missed deduction was thus for the companies to bear,” he added.
Nasscom, the organisation that represents the software industry, said: “Budget 2012 is disappointing on various counts. Several provisions related to withholding tax, international cross border transactions and GAAR have been introduced in the Finance Bill. These will add further complexity and it is particularly unfortunate that some of them will apply retrospectively.”
But, tax analysts said all was not lost yet. “One question that still remains is what if you are looking at making a payment for a non-resident foreign entity? Then, the foreign entity has an option to be governed by the Indian I-T act or domestic law, or the double tax avoidance treaty that India has entered with various countries. By the double tax avoidance agreement if, they are able to successfully argue that the payments made are not royalty, then the payment cannot be liable for tax. Then they can go either the domestic tax law or the tax treaty, whatever is beneficial for the non-resident entity,” pointed out Himanshu Parekh, partner KPMG.
Sudhir Kapadia, national tax leader, Ernst & Young, added it was questionable how many treaties would have such a provision.
“It will be a case by case scenario. The problem is that this change is retrospective. This will mean re-writing several commercial arrangements that firms have entered. More, the government will now say that since the party has not paid its taxes on time, they will have to pay-interest on it. This is going to give rise to several litigations,” he added.
According to a note by Motilal Oswal, while Infosys has already paid withholding tax on the same, Wipro, TCS and HCL Tech are yet to assess the impact.
“We understand that payments with retrospective effect would happen only if the IT assessment for a particular year is under dispute. If the assessment is closed, it would have no retrospective impact,” said the report.
Source:http://www.business-standard.com/india/news/software-as-royalty-set-to-hit-technology-companies-hard/468483/
