Taxation of Softwares in India: A Direct Tax Perspective

Abstract

The Information Technology Sector is probably the most booming sector in the world at present. This revolution in the market is attributable to a great extent to the increasing use of computer driven softwares and other innovations in the field of intellectual property. This massive progression however, has created a myriad of complexities as far as taxation is concerned. How to tax incomes from softwares and their use has become a topic of debate both in direct as well as indirect taxes are concerned. The debate in indirect taxes is whether software is to be treated as goods or as services. The debate as regards direct taxes is a very interesting one, bordering around the concept of whether income generated from softwares is from the transfer of a “copyrighted right” or the transfer of a “copyrighted article”. The former case would mean that the income is arising out of “royalties” and the latter would entail income generation from “business and profession.” The position of law as regards the same is not a settled one whether in India or internationally. The situation is further complicated when cross border software supply takes place and the various Double Taxation Avoidance Agreements come into picture. An attempt has been made in this paper to elucidate the exact legal position of software taxation while discussing its applicability under both heads of income in different situations through the application of various case laws on the subject.