Tax waiver on softwares

The recent assurance by Finance Minister Pranab Mukherjee to amend multi-level tax deduction at source (TDS) on software under Section 194 J (of the Income-Tax Act), says that a 10% tax deduction needs to be made at each point of sale. The government has taken this move on the advice of Nasscom. The Indian software companies and its channel partners can breathe a sigh of relief after the announcement of the news. If all goes well, this notification is excepted to be implemented from July 1, 2012.

As per the Finance Ministry, sale of locally-made software will not be subjected to tax deduction at multiple levels, wherein the multiple level TDS deduction will continue to apply on multinationals such as Microsoft and Adobe. Income from sale of software for these MNCs will be counted as royalty payments, as the copyright for such software remains abroad.

Meanwhile, software partners are waiting to receive notification from the Finance Ministry by June 20. Till then, all the software partners are under dilemma, since there is no clarity being announced by Finance Minister on the exact source of TDS. This plight of multilevel TDS was creating cash flow issues for the dealers as well as increase in cost of software.

Currently, 10% deduction of TDS is applicable at every level of the software sales distribution chain at source starting from importers, distributors, sub-distributors, resellers and end customers.

While welcoming this move, Harinder Salwan, secretary, Infotech Software Dealers Association,(ISODA) said, "This is a good move taken by the Finance Ministry to reduce the burden of multilevel TDS deduction on software. Having said that we are yet to get clarity at the source level. But we want this burden should be absorbed either by vendors or distributors. Moreover, if government exempt us(channel partners), this will result in reduction in piracy and more partners will also be encouraged to come back to the business."

It is to be noted that almost 40% of the value of software was getting stuck in TDS. Therefore, companies are finding difficulty in blocking their working capital for 3 years.

Commenting on the government's move, Paresh Shah, one of the member of ISODA added, "Today, in the sale of software, we make margins as low as 5-6%, due to the 10% TDS at every level. My entire working capital is getting slaughtered every year and we get tax return after 3 years. In this current scenario, our funds are getting locked for long durations, and hence we are crossing our fingers and praying for the notification to work in our favor."

Salwan also added, "Government should rope in multinational software as well under the ambit, as the software sold by MNCs are counted as royalties. This step can boost sales of genuine software."