Software tax: IT MNCs up in arms against govt


2 May 2011
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BANGALORE: The world's top software companies have enlisted America's biggest law firm to lobby with Prime Minister Manmohan Singh against software tax changes proposed in the Union Budget.

Baker & McKenzie, writing on behalf of the Software Coalition group, which includes Microsoft, Oracle and Adobe, warned that if the tax changes are implemented, software companies could reconsider the amount they are willing to invest in India.

"To impose new rules with retroactive effect to 1976 under the guise that they are clarifications violates fundamental notions of fairness," the law firm's partner, Gary D Sprague, wrote in an April 10 letter also marked to Finance Minister Pranab Mukherjee, Law Minister Salman Khurshid and Commerce Minister Anand Sharma.

The global software industry is the latest to join in the chorus of protests against the numerous retroactive amendments proposed in Budget 2012. On Tuesday, the UK's Vodafone Group told the government it intends to start arbitration proceedings against a proposal to use retrospective amendments to tax its acquisition of Hutchison Essar in 2007.

In recent weeks, several global trade bodies have also cautioned the government against retroactive amendments to tax laws saying such a step could affect investments in India.

The hiring of a legal firm by the Software Coalition to write to the PM does not necessarily mean a threat of litigation, said Somasekar Sundaresan, a partner at corporate law firm J Sagar Associates. "In the US, it is not unusual for affiliates of legal firms to undertake lobbying efforts on behalf of clients."

In fiscal 2012 alone, 18,000 crore worth of software products were sold in India, according to data from India's software services industry body Nasscom.

Experts say it is hard to even estimate additional liability on account of the new retrospective changes.

"It would be staggering, and I would be surprised if that amount does not run into billions of dollars," said Dinesh Kanabar, deputy chief executive and chairman of tax practice at the Indian arm of audit and consultancy KPMG.

Budget 2012 proposed some 'clarifications' on tax provisions relating to the use of packaged software. As such software involves copyrighted content, tax authorities redefined the sale of software as sale of copyright and hence the income from such transactions as royalty. The change is meant to be applicable from 1976.

But the law firm has said the proposed change is contrary to international norms as well as the rulings of a majority of Indian courts and tribunals.

Baker & McKenzie argued that the "unilateral shift" by Indian tax authorities would create "very significant conflicts in the legal treatment of cross-border software transactions between India and its trading partners" and make software more costly for Indian consumers.

Multiple litigations are pending in different courts in India, both in high courts as well as the Supreme Court, challenging authorities who have sought to tax income from the sale of software as royalty.

While some courts have turned down such tax demands and others have accepted them, the government's view is that 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.

Anupam Khanna, chief economist and director of policy outreach at Nasscom, said the industry body has been in consultation with the government on the subject of retrospective tax amendments related to software packages.

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