India Considering Tax Options For Software And Outsourcing Firms

by Lorys Charalambous, Tax-News.com, Cyprus

02 September 2003

The Indian government has mandated the Central Board of Direct Taxes (CBDT) to study the question of taxation of income from software and business process outsourcing in the context of rapid Internet development. Uncertainties over the tax treatment of such revenue streams are compounded by increasing difficulties with the concept of a Permanent Establishment, which has historically been central to identifying taxable bodies.

A J Majumdar, joint secretary at the CBDT, called for an examination of the issue under the terms of the Indian/US Double Taxation Avoidance Agreement as there is no consistency in the laws surrounding the taxation of royalties under US law and OECD regulations. However, whilst speaking at an interactive session on the Indo/US taxation treaty, Majumdar said the Indian government must retain the right to tax income which originates in India, explaining that tax credits will be available to cushion the blow to the software industry.

A parallel problem is the question of the Indian/Mauritius Double Tax Avoidance Agreement, under which Indian software firms have increasingly been setting up Permanent Establishments in Mauritius, thus exempting themselves from Indian taxation.

The CBDT is expected to issue a circular shortly on the subject of the taxation of the software industry.

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