FM does away with multi-level TDS on packaged software

The finance ministry on Wednesday provided relief to the Rs 18,000-crore (Rs 180-billion) software industry by replacing a multi-level structure of tax deducted at source (TDS) on distributors with a single TDS. This would be deducted by the first distributor -- one who directly purchases packaged software from a developer.

The move, announced by Finance Minister Pranab Mukherjee, would help small-level distributors, cash flow for whom are choked by TDS at each stage of distributorship.

Though distributors get refunds on TDS, industry sources said this happen after a long time, leading to a fund squeeze. They added small distributors worked on a margin of just two per cent.

"On the advice of Nasscom (National Association of Software and Service Companies), I have approved the issuance of a circular to avoid multi-level TDS on software under section 194 J (of the Income Tax Act)," Mukherjee said.

At present, various distributors are involved in selling a particular software. A software developer sells his product to a distributor (master distributor), who sells it to another, and so on.

Currently, TDS of 10 per cent is levied at each stage. Every distributor has to deduct this. Once the new system is in place, TDS would only be levied on the software developer by the master distributor.