Seeking to remove apprehensions of the software industry, Finance Ministry, on Thursday, 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 software exports.
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 the software industry arising out of interpretation of existing provisions of the tax structure in the IT Act (with respect to Sections 10A, 10AA and 10B),” she said.
The domestic software industry has been getting tax incentives under the provisions of Sections 10A, 10AA and 10B of the Income Tax Act.
The clarifications, Ms. Saxena said, were based on the recommendations of the Rangachary Committee, which was appointed by Prime Minister Manmohan Singh in July last to address the concerns of the software industry.
These efforts are part of the exercise taken by the Finance Ministry to restore investor confidence and ensure a non-adversarial regime.
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 CBDT clarified that the software developed abroad at the 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 also clarified that companies could continue to enjoy tax holiday even in case of physical relocation of a SEZ (special economic zone) unit to another SEZ unit.
Besides, R&D activities for engineering and design by software companies would be eligible for tax deductions.