No more TDS on locally-made software, assures Finance Minister

Sale of locally-made software in the country will no more be subject to tax cuts at various levels, assured the Finance Minister Pranab Mukherjee, on Wednesday, bringing much relief to those associated with the nation’s $5-billion industry, reports The Economic Times. Reports coming in also clarify that the finance ministry will issue a circular to avoid multi-level taxation on software products. This move will ensure that the current 10 percent tax cut at source, according to Section 194H and Section 194J of the I-T Act applies to every level of the software sale distribution chain will be eased. Domestic companies, like Tata Consultancy Services, Infosys and Tally Systems will be among those who would benefit from this, since this way they wouldn’t have to deal with tax hassles at every level of the sale. The circular citing no tax cuts, however, will not benefit the multinationals operating in the country, like Microsoft and Adobe, since the income from the sale of the software of these multinationals is counted as royalty payments and the copyright to their software is abroad. 

No more TDS (Image credit: Getty Images)

Mukherjee added that his move to waive off multi-level TDS on software came about on the advice of NASSCOM (National Association of Software and Services Companies). He was further quoted as saying, “I have approved issuance of a circular to avoid multi-level TDS (tax deducted at source) on software under Section 194 J (of the Income-Tax Act) on the advice of NASSCOM (National Association of Software and Services Companies).” The Economic Times report quoted the President of Nasscom, Som Mittal saying, “A_lmost 40% of the value of software was getting stuck in TDS. It was getting very difficult for companies, and only increased software piracy. Every year $5-6 billion worth of software gets sold in India. It was leading to an unsustainable model for software distributors who operate on very low margins._” 

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Needless to add the decision has earned the appreciation of all domestic software makers. Quoting RL Prakash, Chief Financial Officer at Tally Solutions, “Almost 100% of my entire turnover of 227 crore passes through a complicated tax structure. Besides Tally, we have generally three distributors in our chain. Due to the 10% TDS at every level, my entire working capital was getting slaughtered every year.”

With tax cuts being shown the door for locally-made software, we can expect there to be a dip in the prices of the local software. However, the larger picture will still remain the same, considering that biggies, like Microsoft and Adobe have been left out.