In a possible relief for companies such as Infosys Ltd, Wipro Ltd and Tata Consultancy Services Ltd, Australia has agreed to address the issue of double taxation affecting Indian technology firms. However, a final resolution may take time, as the existing India-Australia Double Taxation Avoidance Agreement (DTAA) may need to be amended.
Along with the ongoing discussions on a free trade agreement, the tax issue under the finance ministry is also being discussed. An interim trade deal is expected within 30 days.
During his three-day visit to New Delhi last week, Australian Trade Minister Dan Tehan met Finance Minister Nirmala Sitharaman and discussed the issue of double taxation.
Under the provisions of the India-Australia DTAA, income arising from offshore software services provided from India is taxed as royalties in Australia, while the same income is also taxed in India.
According to industry estimates, Indian IT firms have lost over $1 billion in taxes due to DTAA.
The DTAA has been a subject of contention between the two countries for triggering lawsuits and inflating costs for Indian IT companies in Australia. New Delhi has asked Canberra to resolve the issue while the two sides are negotiating a free trade agreement. One of the proposals could help Indian IT companies scale up operations in Australia.
“We have told Australia that the long-pending issue of double taxation affecting Indian software and tech firms should also be resolved with a free trade agreement. They have agreed to look into the matter. Talks are on and we are studying his proposal.”
Most IT firms undertake projects where they do some part of the work on site, and some from India. However, Australian courts have ruled that work done from India can also be considered royalty and taxed under Australian laws. The same income is taxed in India anyway.
“Double taxation is affecting the profitability of Indian IT firms. The Indian side had taken up the matter with Australia, who are keen to resolve it expeditiously.” He added that the resolution may take time, as the tax treaty may need to be renegotiated.
The Indian IT industry wants the government to resolve the issue of double taxation before the ‘early harvest’ pact. However, it is learned that the Australian side is seeking a bilateral investment treaty to protect Australian investments in India.
In a 2018 ruling against Tech Mahindra, the Federal Court of Australia ruled that payments received by an Indian company from its customers in Australia would be taxed in Australia. The Court has treated such payments as royalty, which may be taxed, even though such income may not be taxed under local Australian laws. The services provided by Tech Mahindra were performed partly by its employees based in Australia and partly by its employees in India. The dispute pertains to the services provided by Tech Mahindra employees in India.
Arpita Mukherjee, Professor, ICRIER said that the industry is in a unique position where the services provided are being taxed only because of bilateral tax treaties.
“We have a DTAA, but instead it is acting as a shield, it is acting as a sword. Tax liability is being created on account of DTAA,” said another IT expert in anonymity. Said on condition of
Queries sent to the Finance Ministry remained unanswered.
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