End in sight for Indian IT's Australian woes?
2 min read . Updated: 15 Feb 2022, 01:34 AM IST
PremiumThe tax matter is being negotiated alongside ongoing discussions on a free trade agreement
Australia has agreed to resolve the double taxation issue affecting Indian technology firms, two Indian government officials said, in a potential relief for companies such as Infosys Ltd, Wipro Ltd and Tata Consultancy Services Ltd operating there. However, a final resolution could take time, since the existing India-Australia double taxation avoidance agreement (DTAA) may need to be revised.
The tax matter, which comes under the finance ministry, is being negotiated alongside ongoing discussions on a free trade agreement. 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 double taxation issue.
Under the provisions of the India-Australia DTAA, income generated from offshore software services rendered from India gets taxed as royalty in Australia, while the same income is taxed in India as well.
According to industry estimates, Indian IT firms have lost over $1 billion in taxes due to the DTAA.
The DTAA has been a bone of contention between the two countries, triggering lawsuits and raising costs for Indian IT companies in Australia. New Delhi has asked Canberra to resolve this issue even as the two sides negotiate a free trade agreement. A resolution could help Indian IT companies scale up operations in Australia.
“We have asked Australia that the long-pending issue of double taxation, affecting the Indian software and tech firms should also get resolved simultaneous to the free trade pact. They have agreed to look into the issue. Negotiations are on and we are studying their proposal," one of the two officials cited above said.
Most IT firms take up projects where they do some portion of work on site, and some from India. However, Australian courts have ruled that even the work done from India can be considered as royalty and taxed under Australian laws. The same income is anyway taxed in India.
“The double taxation has been impacting profitability of Indian IT firms. The matter was raised by the Indian side with Australia, who are willing to resolve it expeditiously," the second official said. 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 double taxation issue before the ‘early harvest’ agreement. However, it is learnt 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 clients in Australia will be taxed in Australia. The court has treated such payments as royalty, which can be taxed, even though such proceeds cannot be taxed under local Australian laws. The services provided by Tech Mahindra were partly performed by employees located in Australia and partly by its staff in India. The dispute pertained to the services provided by Tech Mahindra’s employees in India.
Arpita Mukherjee, professor, ICRIER said the industry is in a unique situation wherein the services rendered are being taxed only because of the bilateral tax treaty.
“We have a DTAA, but instead of that working as a shield, it is working as a sword. The tax liability is being created because of the DTAA," another IT expert said on condition of anonymity.
Queries sent to the ministry of finance remained unanswered.
