The exemption from multi-level TDS would be applicable in case where the software is acquired in a subsequent transfer, without any modification

New Delhi: In a big relief to the software industry, the Indian government has decided to do away with the complex multi-level system of tax deduction at source (TDS) for the sector from 1st July, reports PTI.

"... no deduction of tax shall be made on... payment by a person (transferee) for acquisition of software from another person (transferor), being a resident," a Central Board of Direct Taxes (CBDT) notification said.

The new provision will come into force from 1 July 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.

NASSCOM President Som Mittal said the announcement will help alleviate industry's concerns on the issue. "TDS deduction was leading to cash flow issues for the dealers as well as increase in cost of software as dealers could not afford funds getting locked in for long durations," NASSCOM said.

Multinational companies resort to transfer pricing to shift profits from high-tax countries to low-tax jurisdictions with a view to reducing overall tax liability.

See the government order on multilevel TDS below...