Software firms will continue to get tax benefits, assures CBDT

Seeking to remove apprehensions of the software industry, Finance Ministry today clarified that domestic and overseas software developers would continue to get tax benefits under the Income Tax Act.

The clarifications, which come ahead of Finance Minister P Chidambaram's visit to Hong Kong and Singapore to attract investments, were issued by the Central Board of Direct Taxes (CBDT) in response to the apprehensions expressed by the industry with regard to taxation of profits from export of software.

Chidambaram is scheduled to leave for the two-nation tour on night of January 21. He is also expected to visit Germany and the United Kingdom later in the month.

CBDT Chairperson Poonam Kishore Saxena told reporters that the software industry would continue to get tax benefits for onsite development of software, deployment of manpower abroad and  transfer of SEZ from one unit to another, among others.

"These clarifications will address the disputes or concerns of software industry arising out of interpretation of existing provisions of tax structure in the IT Act (with respect to Sections 10A, 10AA and 10B)," she said.

The Indian software industry has been getting tax incentives under the provisions Sections 10A, 10AA and 10B of the Income Tax Act.

The clarifications, Saxena said, were based on the recommendations of the Rangachary committee which was appointed by Prime Minister Manmohan Singh in July last year to address the concerns of the software industry.

These efforts are part of the exercise taken by Finance Ministry to restore investor confidence and ensure a non-adversarial regime.

Soon after assuming charge of the Ministry in August last year, Chidambaram had said: "Clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution and an independent judiciary will provide great assurance to investors. We will take corrective measures wherever necessary."

Earlier this week, government deferred the controversial General Anti Avoidance Rules (GAAR) by two years to April 2016.

Describing the CBDT clarification as a positive step, software industry body NASSCOM said: "It is important that the implementation is carried on efficiently".

There were disputes in the interpretation of the tax laws on whether on-site development of computer software qualifies as an export activity for tax benefit and whether deputation of technical manpower for such activity is eligible for tax deductions.

The Central Board of Direct Taxes (CBDT) clarified that the software developed abroad at client's place would be eligible for benefits under the provision as it would be deemed as export.

It further said profits earned as result of deployment of technical manpower at the client's place abroad specifically for software development pursuant to a contract between the client and the company would be deemed as profit earned from exports.

Among other issues flagged by the software industry, the CBDT clarified that companies can continue to enjoy tax holiday even in case of physical relocation of an Special Economic Zone (SEZ) unit to another SEZ unit.

Besides, Research and Development (R&D) activities for engineering and design by software companies would be eligible for tax deductions.

The Rangachary committee had submitted its report to the Finance Minister on September 14, 2012.

"The recommendations of the Committee in its report, pertaining to other issues concerning Development Centres and its subsequent two reports on Safe Harbour Provisions for IT and Information Technology Enabled Services (ITES) sector ...," Saxena said.

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