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India charges a 10% royalty tax, but the ruling means a non-resident foreign software seller without a permanent establishment in India, would not have to deduct the royalty tax at the source

With tax relief, multinational companies such as IBM, Hewlett Packard and Samsung Electronics, which import software for sale in India, could even lower their prices for the end-user

The SC ruling in question came after an examination of around 86 appeals and counter appeals by various software firms as well as India’s Commissioner of Income Tax

Big tech companies Google, Facebook and Amazon could start claiming hundreds of crores in refunds from the Indian government, as a Supreme Court ruling on Tuesday clarified that payments made by local users for the purchase of software from non-resident sellers or distributors cannot be taxed as royalty.

India charges a 10% royalty tax, but the SC ruling means a non-resident foreign software seller without a permanent establishment in India would not have to deduct the royalty tax at the source. Instead, sellers such as the tech giants and other software providers would have to pay the 2% equalisation levy, which was introduced in the Finance Act, 2020. 

With the relief, multinational companies such as IBM, Hewlett Packard and Samsung Electronics, which import software for sale in India, could even lower their prices for the end-user, as their tax liability will now reduce. 

The SC ruling came after an examination of around 86 appeals and counter appeals by various software firms as well as India’s Commissioner of Income Tax. Software companies have been deducting the royalty tax at source for years or have been in litigation for the same. 

The apex court in its ruling observed that the end-user licence agreements upon purchase of software, do not entail licensing of any copyright. As such, the definition of royalty in the double taxation avoidance agreement (DTAA) can’t be applied to such cases. 

Legal experts are of the opinion that various software firms who’ve been deducting the royalty tax for years, could now flock to the taxman’s door for refunds. 

Some of these firms would still have to pay the 2% equalisation levy on the gross consideration amount. 

The equalisation levy, also known as ‘Google Tax’ or digital tax, is seen as an effective measure for taxing ecommerce companies that have a presence in India, but by billing their customers from offshore units, escape the purview of the country’s tax regime. Details of the levy were part of the Finance Bill, proposed along with the Union Budget 2021. 

The Finance Bill, 2021, which proposes several amendments to the country’s taxation regime, contains clarifications about the 2% equalisation levy. 

The bill clarifies ecommerce supply or service to mean ‘online sale of goods’ and ‘online provision of services’, which shall include one or more of the following online activities, namely: acceptance of offer for sale; placing of the purchase order; acceptance of the purchase order; payment of consideration; or supply of goods or provision of services, partly or wholly.

To put it simply, the online sale of goods and services by non-resident ecommerce companies to Indian customers, will be subject to the 2% levy. The levy will be placed on the gross amount of the transaction, and not on the facilitation fee, as certain firms had requested last year. 

Further, the levy will apply, regardless of whether the non-resident ecommerce company receiving the transaction owns the goods or services, or is just facilitating the provision of goods and services to Indian customers.