Import of software
This query is : Resolved
27 July 2012
If an Indian Company is importing computer software from abroad, it it necessary to withhold tax on it? Please give reference for the same. Is there any amendment regarding the same in the Budget 2012?
28 July 2012
Yes, it is necessary to withhold tax on such transactions.
However, (in Budget 2012), any subsequent transfer of software (transferor being resident), no tax shall be deducted subject to certain guidelines.
For more clarity you may refer the notification no 21/2012 of Income Tax.
However, (in Budget 2012), any subsequent transfer of software (transferor being resident), no tax shall be deducted subject to certain guidelines.
For more clarity you may refer the notification no 21/2012 of Income Tax.
30 July 2012
Thanks Sir. I have gone through Notification No. 21/2012. It speaks about Purchasing Software from Residents. Could you please clarify more for withholding tax on import of software. It would be very nice of you if you could tell where it is written for applicability of withholding tax on import of software. Thanks & Regards
28 July 2024
When dealing with the import of software into India, withholding tax implications can arise depending on the nature of the software and the contractual terms with the foreign supplier. Below is a comprehensive overview of the withholding tax on software imports and any relevant changes, including Budget 2012 amendments:
### **1. Withholding Tax on Import of Software**
#### **A. General Principle**
1. **Nature of Payment:**
- Payments made for the import of software, particularly if it's for royalty or fees for technical services, can be subject to withholding tax under the Income Tax Act, 1961. The nature of the software (whether it is a standard software or customized software) will influence the applicability of withholding tax.
2. **Applicable Section:**
- **Section 195** of the Income Tax Act, 1961 mandates that any person making a payment to a non-resident (including payment for software) is required to withhold tax at source. The applicable rate depends on whether the payment qualifies as "royalty" or "fees for technical services."
#### **B. Specific Tax Provisions**
1. **Royalty:**
- Under **Section 9(1)(vi)** of the Income Tax Act, payment for the use or the right to use any copyright (including software) is considered royalty. Hence, it is subject to withholding tax.
- The rate of withholding tax on royalty is typically 40% plus applicable surcharge and cess, unless a lower rate is specified in a Double Taxation Avoidance Agreement (DTAA).
2. **Fees for Technical Services:**
- **Section 9(1)(vii)** defines fees for technical services and these payments are also subject to withholding tax if they arise or accrue in India.
- The withholding tax rate for fees for technical services is similar to that for royalty.
#### **C. Amendments and Budget 2012**
1. **Budget 2012 Amendments:**
- The Budget 2012 made specific amendments to clarify the taxation of payments for software. The Finance Act, 2012 introduced significant changes by categorizing payments for software as royalty. The amendments were aimed at addressing issues related to the taxation of software, especially concerning payments for the use of software.
2. **Key Amendments:**
- The Budget 2012 reinforced that payments for the transfer of rights to use software (including standard software) are classified as royalties and are thus subject to withholding tax.
#### **D. Documentation and Compliance**
1. **Withholding Tax Certificate:**
- Ensure that withholding tax is deducted at the prescribed rates and obtain a Tax Deducted at Source (TDS) certificate.
2. **Filing Returns:**
- File TDS returns in accordance with the Income Tax Act and provide necessary documentation to the authorities.
3. **DTAA Benefits:**
- If applicable, use the benefits of a Double Taxation Avoidance Agreement (DTAA) to reduce the withholding tax rate.
### **2. Practical Example**
If an Indian company imports computer software from a foreign company and the payment qualifies as royalty under Indian tax laws, the company should:
1. **Determine the Nature of Payment:** Confirm if the payment falls under royalty or technical services.
2. **Withhold Tax:** Deduct tax at the rate specified under the Income Tax Act or applicable DTAA.
3. **Comply with Filing Requirements:** File TDS returns and issue the necessary TDS certificate to the non-resident.
### **References**
- **Income Tax Act, 1961:** Sections 9(1)(vi), 9(1)(vii), and 195.
- **Finance Act, 2012:** Relevant sections relating to amendments in taxation of software.
### **Summary**
Payments for the import of software are generally subject to withholding tax if classified as royalty or fees for technical services. The Budget 2012 confirmed that such payments should be treated as royalty, and withholding tax should be applied accordingly.
**Recommendation:**
For precise compliance and application of tax rates, consulting a tax professional is advisable. They can provide specific guidance based on the nature of the software and the applicable Double Taxation Avoidance Agreement (DTAA) provisions.
### **1. Withholding Tax on Import of Software**
#### **A. General Principle**
1. **Nature of Payment:**
- Payments made for the import of software, particularly if it's for royalty or fees for technical services, can be subject to withholding tax under the Income Tax Act, 1961. The nature of the software (whether it is a standard software or customized software) will influence the applicability of withholding tax.
2. **Applicable Section:**
- **Section 195** of the Income Tax Act, 1961 mandates that any person making a payment to a non-resident (including payment for software) is required to withhold tax at source. The applicable rate depends on whether the payment qualifies as "royalty" or "fees for technical services."
#### **B. Specific Tax Provisions**
1. **Royalty:**
- Under **Section 9(1)(vi)** of the Income Tax Act, payment for the use or the right to use any copyright (including software) is considered royalty. Hence, it is subject to withholding tax.
- The rate of withholding tax on royalty is typically 40% plus applicable surcharge and cess, unless a lower rate is specified in a Double Taxation Avoidance Agreement (DTAA).
2. **Fees for Technical Services:**
- **Section 9(1)(vii)** defines fees for technical services and these payments are also subject to withholding tax if they arise or accrue in India.
- The withholding tax rate for fees for technical services is similar to that for royalty.
#### **C. Amendments and Budget 2012**
1. **Budget 2012 Amendments:**
- The Budget 2012 made specific amendments to clarify the taxation of payments for software. The Finance Act, 2012 introduced significant changes by categorizing payments for software as royalty. The amendments were aimed at addressing issues related to the taxation of software, especially concerning payments for the use of software.
2. **Key Amendments:**
- The Budget 2012 reinforced that payments for the transfer of rights to use software (including standard software) are classified as royalties and are thus subject to withholding tax.
#### **D. Documentation and Compliance**
1. **Withholding Tax Certificate:**
- Ensure that withholding tax is deducted at the prescribed rates and obtain a Tax Deducted at Source (TDS) certificate.
2. **Filing Returns:**
- File TDS returns in accordance with the Income Tax Act and provide necessary documentation to the authorities.
3. **DTAA Benefits:**
- If applicable, use the benefits of a Double Taxation Avoidance Agreement (DTAA) to reduce the withholding tax rate.
### **2. Practical Example**
If an Indian company imports computer software from a foreign company and the payment qualifies as royalty under Indian tax laws, the company should:
1. **Determine the Nature of Payment:** Confirm if the payment falls under royalty or technical services.
2. **Withhold Tax:** Deduct tax at the rate specified under the Income Tax Act or applicable DTAA.
3. **Comply with Filing Requirements:** File TDS returns and issue the necessary TDS certificate to the non-resident.
### **References**
- **Income Tax Act, 1961:** Sections 9(1)(vi), 9(1)(vii), and 195.
- **Finance Act, 2012:** Relevant sections relating to amendments in taxation of software.
### **Summary**
Payments for the import of software are generally subject to withholding tax if classified as royalty or fees for technical services. The Budget 2012 confirmed that such payments should be treated as royalty, and withholding tax should be applied accordingly.
**Recommendation:**
For precise compliance and application of tax rates, consulting a tax professional is advisable. They can provide specific guidance based on the nature of the software and the applicable Double Taxation Avoidance Agreement (DTAA) provisions.
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