Software Case Study

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INTRODUCTION
India has seen a rapid growth in the field of information technology and as a result business process outsourcing and bio-informatics industry have developed in India. This has further led to an increase in the Indian companies acquiring software from foreign companies.
TYPES OF SOFTWARE
There are two types of application software which are created depending upon the needs of the parties - shrink-wrapped/canned software or customized software. In the case of shrink wrapped software, it is not specifically created for a particular consumer and an Indian company can acquire its license. It is readily available in the market e.g. Tally packages, Windows, Microsoft Office etc. In this case the ownership is retained by the developer.
On the other hand, customized software are created specifically to meet the special requirements of a customer based upon his preferences and expectations. In the case of customized software, the ownership in the software may or may not remain with the software developer.
Before we begin, it is imperative to define what software means. Under the Indian Income Tax Act, 1961, software has been defined as -
(a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or
(b) any customised electronic data or any product or service of similar nature as may be notified by the Central Board of Direct Taxes, India.
Section 2(ffc) of the Indian Copyright Act, 1957 defines “Computer Programme” as a set of instructions expressed in words, codes, schemes or any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result. Therefore it can be said that the word software ne...

... middle of paper ...

...as business income. However, in those cases where the consideration paid gives the right to commercially exploit the intellectual property in the software, then it would amount to royalty.
Furthermore, the Government should clarify that the amendments in the Act regarding taxation of software would not have any impact on treatment under the DTAA. To bring more clarity on the issue, the Government may also issue a white paper to discuss with the stakeholders and clarify the tax treatment of software payments.
CONCLUSION
It is essential for the economy of a country to have simple and unambiguous tax provisions so that the tax laws can be implemented smoothly and prevent tax evasion. It is an urgent requirement that the Government clarify all the issues pertaining to the taxation of software and bring relief to the exponentially growing software trade and industry.

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