The decision will improve finances of the IT sector

Providing a welcome relief to the software industry as promised by Finance Minister Pranab Mukherjee last week, the government, on Thursday, freed the information technology sector from the complex multi-level system of TDS (tax deduction at source) with effect from July 1.

Under the existing taxation structure, a 10 per cent TDS is levied at each level of the software distribution chain — right from the master distributor end to the retailer and on to the final consumer. Announcing the coming into force of the new provision from July 1, following amendments to the relevant Section 194(J) of the Income Tax Act, 1961, a CBDT (Central Board of Direct Taxes) notification said: “... no deduction of tax shall be made on ... payment by a person (transferee) for acquisition of software from another person (transferor), being a resident.” Section 194(J) of the IT Act, in particular, deals with fees for professional and technical services and includes royalty and non-compete fees. In response to the software industry's long-standing demand, the Finance Minister had stated last week that the relevant Section of the IT Act would be suitably amended to do away with the multi-level TDS on the information technology sector.

As per the notification, multi-level TDS would be exempted even in those cases where the software is acquired in a subsequent transfer, without any modification.

Alongside, the same exemption will be provided in cases wherein tax has been deducted under Section 194(J) on payment for any previous transfer of such software or under Section 195 on payment for any previous transfer of such software from a non-resident. Demanding exemption from the system of multi-level TDS on software, industry body Nasscom (National Association of Software and Services Companies) had argued that the levy “was leading to an unsustainable model for software distributors who operate on very low margins” and its removal would improve finances of the IT sector.

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