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Budget 2012: IT companies fear tax burden from software royalty law

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Major international companies like Microsoft, GE, Samsung, HP and Sonata Software fear facing fresh tax burden after the government clarified tax provisions relating to the use of packaged software. In high courts as well as the Supreme Court, multiple lawsuits are pending challenging authorities who have sought to tax income from the sale of software as royalty.


This has been a point of contention raised by foreign software product companies such as Microsoft that sell its software products in India. While some courts have turned down such tax demands, others have accepted them. The amendment seeks to settle the confusion by deciding in favour of the tax authorities by changing the explanation of the term royalty to specifically include computer software.


The change has been made applicable from 1976. There is substantial litigation on the subject with most courts holding that such income is business profit not taxable unless there is a permanent establishment in India. At least 15 firms that are facing tax claims related to sale of software could be impacted.


Industry body Nasscom called the amendment “retrograde,” but said the fine-print needs to be studied in detail before its implications can be understood. There are also those within the tax community who think the changes may not have significant impact because the provisions are related to non-resident firms and the amendments are “subservient” to tax treaties that the home country of non-resident firms have with the Indian government.

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