Govt To Change Definition Of Software

The government will change the definition of "computer software" given in the Finance Bill, 2000 to extend tax holiday to the on-site services revenues of software companies in STPs and EPZs. Information Technology ministry sources said the amendment required for this purpose in the Income Tax Act will be presented before Parliament in the winter session for its clearance. At present, on-site services constitute about 58 per cent of the total revenue of software companies in the country and in 1999-2000 this segment contributed around Rs 6,000 crore to the business of these companies. The definition of "computer software" given in the Finance Bill-2000 for providing graded tax holiday upto 2010 through a new section 10A of the Income Tax Act, would lead to exclusion of on-site services from this benefit. Explanation 2 under the new section 10A defines "computer software" as any computer program recorded on any disc, tape, perforated media or other information storage device; or any customised electronic data or any product or service of similar nature, as may be notified by the CBDT, which is transmitted or exported from India to any place outside India by any means. The effect of this definition is that computer software should be trasmitted or exported from India to any place outside India to get the benefit of tax holiday. The production of software at client's premises in a country outside India (on-site development), even though it earns convertible foreign exchange, would not be eligible for deduction under section 10A. The software industry has asked the government to restore tax holiday to on-site services as the government, in principle, had allowed all kinds of software exports from STPs, EOUs and EPZs a graded tax holiday of 10 years upto 2010 through the Finance Bill 2000. The CBDT in regard to the old section 10A and 10B had extended the tax holiday to on-site services of software companies with the help of a circular in 1994. The National Association for Software and Service Companies in a representation to the CBDT has said that having regard to the legislative intent of new section 10A and the technical and business requirements that on-site services are integral part of computer software exports, the CBDT circular of 1994 should also be made applicable to new section 10A and 10B. However, sources said that "the circular cannot go beyond law". They added that the government was studying if reiteration of the old circular could serve the purpose for the time-being. Sources also said that the ultimate solution to the confusion lied in a change in the definition of `computer software' for extending the tax holiday to on-site services of software companies.