In the next Budget, the government is likely to impose a tax on the royalty from imported software as a withholding tax.
The decision will affect business process outsourcing companies, which use proprietary software imported from their parent companies abroad.
Slide Show: India powers ahead on BPO!
Outsourcing and India: Complete Coverage
Click here to take today's poll
The expert committee on emerging areas of taxation, appointed by the Central Board of Direct Taxes, is expected to finalise its report on the issue soon.
The CBDT is toying with the idea of taxing royalty income on such software as it feels it has emerged as a big component of transactions between BPO companies and their principals abroad.
The board has, however, assured these companies that the move will not hurt them as they will get tax credit on foreign soil for the tax paid here.
The expert committee is meeting industry leaders tomorrow before finalising its report on the issue.
Once implemented, the tax department will consider such imports as final services rendered and impose a withholding tax on it. This is in line with the tax treatment of purchases of copyrighted products like recordings, designs, patents etc.
However, the department may have to contend with an anomaly here as the Customs departments treats software as a product and exempts it from tax.
Industry experts said the government must ensure that there was no dichotomy in the treatment of an item by its two revenue collection arms.
They also said there was an associated risk of a possible backlash if the tax was imposed. As India exports more software than it imports, recipient countries can impose a countervailing tax on the former and so price Indian products out of the market.
Finance Minister Jaswant Singh is expected to soon clear a related proposal, which seeks to exempt multinationals from paying tax on call centres located in India.
More from rediff