'Expect govt to remove or reduce TDS on software to 2%'

Budget 2021 | Expect government to remove or reduce TDS on software purchases to 2%: Tally Solutions CFO

Being a goods, only software product attracts TDS and there are no other tradeable goods that come under the purview of 10% TDS

Representative Image. Credit: iStock Photo

By Ganesh Subramanian

There is tremendous scope for Indian software products to build upon the strength of the Indian IT industry and the innovative & technological capabilities in the country. India has done well in software services and our next big opportunity is in software products. To realise the potential of the software product industry in an optimal manner, there is a need for a framework to work in synergy and ease in certain taxation issues followed by the software product industry, as enumerated below:

Dispense tax deducted at source (TDS) on purchase of software 

Presently, under section 194 J of the Income Tax Act, TDS @ 10% is applicable on software purchase. The income tax does not make difference in software product and software service. Software products are classified as Goods. Being a goods, only software product attracts TDS and there are no other tradeable goods that come under the purview of 10% TDS. When new start-ups and new ventures are already struggling for working capital, this TDS becomes an additional cash outgo, causing a cash crunch to the Industry. We expect that the Government either remove this TDS or at least reduce it to 2%.

Harmonized System of Nomenclature/Services Accounting Code (HSN/SAC) for Software Products

There is a big dilemma that exists in the industry about using of HSN/SAC code for software products, especially in the case of software products delivered through electronic medium and software as a service (Sass), hosted on a cloud platform. The government may clarify the same.

R&D incentives to software companies 

Till FY 2020, the software product companies were enjoying the benefit through tax incentive for their spends on research and development. Such benefits were extended in the form of additional deduction under section 35(2AB) of the Income Tax Act. This benefit has been withdrawn effective 01 April 2020. The government may extend such incentive schemes or equivalent benefits, in order to promote Research & Development in the Software product sector.

(The author is the Chief Financial Officer at Tally Solutions)