Govt to remove multi-level TDS on software from July

In a big relief to the software industry, the government today said it will do away with the complex multi-level system of Tax Deduction at Source (TDS) for the sector from July 1.

"No deduction of tax shall be made on payment by a person (transferee) for acquisition of software from another person (transferor), being a resident," the Finance Ministry said in a notification. The provisions will come into force from July 1, 2012, it said.
    
Under the current structure, TDS of 10% is levied at every level of software distribution chain right from master distributor to retailer and then to the final consumer. Responding to the long-standing demand of the software sector, Finance Minister Pranab Mukherjee had last week said that Section 194J of the Income Tax Act, 1961, would be amended so as to avoid multi-level TDS on information technology sector.

Section 194(J) of the I-T Act deals with fees for professional and technical services and covers royalty and non-compete fees. The exemption from multi-level TDS would be applicable in case where the software is acquired in a subsequent transfer, without any modification.
    
Besides, the exemption will also be provided in cases where tax has been deducted under 194J 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.
    
Further, it will also apply in those cases wherever the transferor had paid the taxes. Software industry body NASSCOM had been demanding removal of the multi-level TDS on software arguing that such a decision would improve finances of the IT sector. The TDS model, it had argued, "was leading to an unsustainable model for software distributors who operate on very low margins."