Payment for software outside india
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
05 June 2013
Our Client has purchased a software from a foreign company to sell the software in India . what is the nature of payment to foreign company. does our client needs to deduct TDS under DTAA ?
Thanks in advance
Thanks in advance
05 June 2013
Please check DTAA with that country.
Section 194J provides for deduction of tax at source on payment of professional fees, technical fees, directors remuneration and royalty payments
Hence payments towards right to use computer software will be liable to tax deduction at source under section 194J @ 10%
If foreign company holds PAN TDS @ 10% if not 20%.
But however please check Notification 21/2012 Dated July 1, 2012. Before deducting TDS.
Section 194J provides for deduction of tax at source on payment of professional fees, technical fees, directors remuneration and royalty payments
Hence payments towards right to use computer software will be liable to tax deduction at source under section 194J @ 10%
If foreign company holds PAN TDS @ 10% if not 20%.
But however please check Notification 21/2012 Dated July 1, 2012. Before deducting TDS.
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Querist : Anonymous
Querist :
Anonymous
(Querist)
06 June 2013
The Amount Payable for Software, will it not be considered as Royalty Income ?
09 August 2024
When a client in India purchases software from a foreign company, the nature of the payment and the applicability of Tax Deducted at Source (TDS) under the Double Taxation Avoidance Agreement (DTAA) depend on several factors, including the classification of the payment and the provisions of the relevant DTAA. Here’s a detailed analysis:
### **Nature of Payment for Software:**
1. **Payment Classification:**
- **Royalty**: Payments for software can be classified as royalty, particularly if the software involves the right to use or access the intellectual property, or if it includes any form of licensing. According to the Income Tax Act, 1961, such payments are typically considered as "royalty" under Section 9(1)(vi).
- **Business Income**: If the software is purchased outright without any licensing or ongoing rights, the payment might be considered as a purchase of goods or business income, but this is less common in the case of software.
2. **DTAA Provisions:**
- **Double Taxation Avoidance Agreement**: The applicability of TDS and the rate at which it is to be deducted are determined based on the provisions of the DTAA between India and the country of the foreign company. Most DTAAs have provisions dealing with royalty payments, and they usually specify the maximum rate of tax that can be withheld.
- **DTAA Clauses**: Review the specific DTAA between India and the country where the foreign company is based. Typically, these agreements outline the tax treatment of royalties and may provide for reduced rates or exemptions.
### **TDS on Payment for Software:**
1. **Determining TDS Liability:**
- **TDS Applicability**: If the payment is classified as royalty, then TDS is applicable under Section 195 of the Income Tax Act. The rate of TDS will depend on the provisions of the DTAA.
- **TDS Rate**: Refer to the DTAA to determine the applicable TDS rate. For many countries, the rate specified in the DTAA is lower than the standard rate under the Income Tax Act.
2. **Calculation and Deduction:**
- **Deduction**: TDS should be deducted at the time of payment or credit, whichever is earlier.
- **Payment to Foreign Company**: Ensure that the TDS is deposited with the government and a TDS certificate (Form 16A) is issued to the foreign company.
3. **Compliance:**
- **Tax Filing**: File the TDS returns as required, and ensure compliance with all reporting requirements.
- **Documentation**: Maintain documentation to support the nature of the payment, the application of the DTAA, and the TDS deduction.
### **Summary and Steps:**
1. **Classify the Payment:**
- Determine if the payment for the software is classified as royalty under Indian tax laws and the applicable DTAA.
2. **Review DTAA:**
- Check the DTAA between India and the country of the foreign company to determine the applicable TDS rate and any exemptions.
3. **Deduct and Deposit TDS:**
- Deduct TDS at the applicable rate as per the DTAA and deposit it with the government.
4. **File TDS Returns:**
- File the TDS returns and issue a TDS certificate to the foreign company.
5. **Consult Professionals:**
- Given the complexity of international tax issues and the potential impact on compliance, consider consulting a tax professional or advisor to ensure accurate handling of the payment and TDS obligations.
By following these steps, your client can ensure that the payment for software to the foreign company is handled correctly from a tax perspective.
### **Nature of Payment for Software:**
1. **Payment Classification:**
- **Royalty**: Payments for software can be classified as royalty, particularly if the software involves the right to use or access the intellectual property, or if it includes any form of licensing. According to the Income Tax Act, 1961, such payments are typically considered as "royalty" under Section 9(1)(vi).
- **Business Income**: If the software is purchased outright without any licensing or ongoing rights, the payment might be considered as a purchase of goods or business income, but this is less common in the case of software.
2. **DTAA Provisions:**
- **Double Taxation Avoidance Agreement**: The applicability of TDS and the rate at which it is to be deducted are determined based on the provisions of the DTAA between India and the country of the foreign company. Most DTAAs have provisions dealing with royalty payments, and they usually specify the maximum rate of tax that can be withheld.
- **DTAA Clauses**: Review the specific DTAA between India and the country where the foreign company is based. Typically, these agreements outline the tax treatment of royalties and may provide for reduced rates or exemptions.
### **TDS on Payment for Software:**
1. **Determining TDS Liability:**
- **TDS Applicability**: If the payment is classified as royalty, then TDS is applicable under Section 195 of the Income Tax Act. The rate of TDS will depend on the provisions of the DTAA.
- **TDS Rate**: Refer to the DTAA to determine the applicable TDS rate. For many countries, the rate specified in the DTAA is lower than the standard rate under the Income Tax Act.
2. **Calculation and Deduction:**
- **Deduction**: TDS should be deducted at the time of payment or credit, whichever is earlier.
- **Payment to Foreign Company**: Ensure that the TDS is deposited with the government and a TDS certificate (Form 16A) is issued to the foreign company.
3. **Compliance:**
- **Tax Filing**: File the TDS returns as required, and ensure compliance with all reporting requirements.
- **Documentation**: Maintain documentation to support the nature of the payment, the application of the DTAA, and the TDS deduction.
### **Summary and Steps:**
1. **Classify the Payment:**
- Determine if the payment for the software is classified as royalty under Indian tax laws and the applicable DTAA.
2. **Review DTAA:**
- Check the DTAA between India and the country of the foreign company to determine the applicable TDS rate and any exemptions.
3. **Deduct and Deposit TDS:**
- Deduct TDS at the applicable rate as per the DTAA and deposit it with the government.
4. **File TDS Returns:**
- File the TDS returns and issue a TDS certificate to the foreign company.
5. **Consult Professionals:**
- Given the complexity of international tax issues and the potential impact on compliance, consider consulting a tax professional or advisor to ensure accurate handling of the payment and TDS obligations.
By following these steps, your client can ensure that the payment for software to the foreign company is handled correctly from a tax perspective.
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