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NEW DELHI, Dec. 27

THE Task Force headed by Dr Vijay Kelkar on tax reforms has recommended that tax incentives to software exports under the Sec 10A/10B of the Income-Tax Act should be withdrawn after the Government thrashes out totalisation agreements with India's trading partner countries.

India has currently not signed totalisation agreements with countries such as the US. The Task Force has recommended that the tax benefits to the software sector be continued till the agreements are signed.

The Task Force, which recommended elimination of the 10A/10B benefits to all other sectors, has also suggested that the distribution of dividend by software companies availing of deductions under 10A/10B should be subjected to a dividend distribution tax of 30 per cent.

Similarly, the long-term capital gains arising from transfer of equities of such companies should also be subjected to tax like long-term capital gains from any other asset. The Task Force, however, could not arrive at unanimity on the preferred alternative amongst these two measures.

According to the Task Force, a company whose activities are spread across international borders could potentially incur a higher income tax burden on its global profits in comparison to a company whose activities are confined to the national boundaries.

``While companies exporting goods can potentially avoid the liability of the foreign country's federal and state income-tax, the companies in the IT sector must necessarily bear the burden because of the very nature of their activities,'' the Task Force said.

It urged the Government to take immediate steps to negotiate with foreign governments to enter into a comprehensive totalisation agreement leading to a single point of taxes. The Sec. 91 of the I-T Act would be amended to allow full credit for the payment of foreign countries' federal and state income tax.

However, no refund of such foreign tax should be allowed. Responding to the recommendations of the Task Force, the National Association of Software and Service Companies (Nasscom) has reiterated its demand for retaining the full tax exemption under the Sec 10A/10B.

"The alternatives proposed in the revised report are a step forward from the initial consultation paper, and Nasscom is glad to note the Committee's acknowledgement of some of the special circumstances facing the industry. However, Nasscom feels that neither alternative meets the needs of the industry, and will in fact be a setback," the association said in a statement.

``We urge the Government to retain the full tax exemption under section 10 A/ 10 B as originally envisaged," said Mr Kiran Karnik, President of Nasscom, adding ``... we strongly oppose the withdrawal of the tax incentives u/s 10 A/B. The Government had declared a ``no tax'' regime for software exports up to 2009 and the industry requests it to abide by the same.''

The repercussions of this proposed withdrawal of tax exemption up to 2009 extend beyond the software sector, as all other assurances and guarantees by the Government will be seen as doubtful and subject to sudden change.

In the software sector, both Indian and foreign investors have made investments and business plans on the basis of the 10-year tax-free commitment. Going back on this will be grossly unfair and will seriously hurt not only future investments, but also present players, Mr Karnik said.

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