Tax
benefits on export of software, STP and EHTP
There
are various tax provisions under the Income Tax Act 1961 on the
income from export of software.
We will discuss some of the taxation provisions as also will discuss
advantages and steps of setting up a Software Technology Park popularly
known as STP.
TAX PROVISIONS
Income Tax Act U/S 10A: provides for special provision in
respect of newly established undertakings in Free Trade Zones ("FTZs")
etc.
Under this section, profits and gains derived from the export of
articles or things or computer software by an undertaking set up
in any of the Free Trade Zone, Software Technology Park areas
(STP) and electronic hardware technology park ("EHTP")
areas are fully exempt for a period till 31st March 2010.
Income Tax Act U/S 10B: special provision in respect of newly
established hundred percent export oriented undertakings (EOU).
Under this section, profits and gains derived from the export of
articles or things or computer software by a hundred percent export
oriented undertakings (EOU) are fully exempt for a period till 31st
March 2010.
Section 35 of the Income Tax Act provides for tax deduction
of any expenditure incurred on scientific research.
Any expenditure laid out on scientific research related to the business
of a taxpayer is allowed as a deduction while computing taxable
income.
Sub-section (2AB) of section 35 of the Income Tax Act provides for
a deduction of 125% of any expenditure incurred by a company engaged
in the business of manufacture or production of any drugs, pharmaceuticals,
electronic equipments, computers, telecom equipments, chemicals
or any other notified article, on scientific research (not towards
cost of land or building) on in-house research and development facility
as approved by the prescribed authority.
Section 80 HHE of the INCOME Tax Act: deals with the deduction
in respect of profits from export of computer software, etc.
Under this section if a company or a person is engaged in the business
of --
(i) export out of India of computer software or its transmission
from India to a place outside India by any means;
(ii) providing technical services outside India in connection with
the development or production of computer software;
Then the profits derived from his business would be deductible from
its taxable income .The extent of the deduction shall be an amount
equal to 80% for assessment year beginning on 1st April 2001, 60%
for 2002, 40% for 2003, 20% for 2004 and then no deduction will
be allowed there after.
This deduction will be available provided the consideration in respect
of the export of computer software is received in, or brought into
India in convertible foreign exchange within a period of six months
from the end of that financial year. This benefit is available only
to Indian companies or Indian residents. This benefit is also
available to supporting software developer selling computer software
to exporting company.
U/S 10 A (iv) "electronic hardware technology park"
means any park set up in accordance with the Electronic Hardware
Technology Park (EHTP) Scheme notified by the Government of India
in the Ministry of
Commerce;
(v) "Software Technology Park" means any park set
up in accordance with The Software Technology Park Scheme notified
by the Government
of India in the Ministry of Commerce.
Software Technology Park (STP) Scheme
It's features and benefits:
1. STP scheme is a 100% export oriented Scheme for undertaking software
development for export using data communication link or in the form
of physical exports including export of professional services.
2. The central Government, state government, public or private sector
undertakings or any combination may set up a software technology
park (STP) thereof. A STP may be a stand-alone unit or one of the
units located in any STP Complex.
3. The STP unit will be a duty free custom bonded area under section
65 of the customs Act 1962. The normal procedure applicable for
custom bonding will be followed. All the imports to STP units are
duty free.
4. STP/STP Units may be set up anywhere in India.
5. An organisation setting up a STP complex for development and
export of Software through STP scheme may import, free of duty,
the requisite infrastructure equipments with no export obligation.
6. STP unit has tax benefits under Income Tax Act as earlier mentioned.
7. STP units are entitled to sell the computer software in Domestic
Tariff Area (DTA) up to 25% of the software exported in value terms.
8. The capital goods purchased from the Domestic Tariff Area (DTA)
up to 50% of the software exported in values terms.
9. STP may import free of duty all types of goods for creating a
central facility for use by software development units in STP. Software
units shall also be permitted to import capital goods on loan from
clients for specified period for executing specified projects.
10. Foreign equity up to 100% is permissible in the case of STP
units.
11. Software units will be allowed to use the computer system for
training purpose (including commercial training) subject to the
condition that no computer terminal shall be installed outside the
bonded premises for the purpose.
12. The export obligation of a STP unit in net foreign terms shall
be as follows:
Minimum export performance for 5 years.
i ) US$
0.25 Million
(ii) 5 times
the CIF value of imported capital goods whichever is higher.
NFET will be calculated annually and cumulatively for a period of
5 years from the commencement of commercial production, accordingly
to the following formula:
NFET=A-B/A
x 100
A = FOB value of exports by the STP Unit
B = Sum total of CIF value of all imported inputs + CIF value
of all imported capital goods + the value of all payments made
in foreign exchange by way of commission , royalty ,fees, dividends
, interest on external commercial borrowings during the first
five years period or any other charges ,"inputs" means raw materials,
intermediates, components, consumables, parts and packing materials.
For annual calculation of NFET ,1/5th value of imported capital
goods shall be included under B."
Step by step
procedure to set up a Unit under STP Scheme for 100% export of Computer
Software
STEP-1
Send STPI, the Gist of Application.
STEP-2
projected figures for five years to be finalised after discussion
with the Company
STEP-3
Application Form to be submitted in triplicate
STEP-4
Following documents to be attached with Application Form
a)Project report / brochures of the Company
b)Board of Directors' resolution copy / Power of attorney
c) Firm contracts/Agreement/Purchase Order/ MOU with foreign client.
d) Memorandum of Association/Articles of Association of the company.
e) Any other documents related to the company or project for further
clarifications (if required by STPI).
f) If foreign equity or NRI equity is involved then approval from
FIPB or RBI needs to be submitted.
g)Payment towards application processing fees and service charges
depending upon your export turnover
STEP- 5
Application for Import Export Code to be submitted alongwith the
Bank Certificate.
STEP-6
Application for Green card to be submitted
STEP- 7
STPI evaluates the Application and Approval is given , provided
all the above details are furnished correctly
STEP-8
Approval letters is issued
STEP-9
Agreement Paper is signed between Director, STPI and the Authorised
signatory of the Company.
STEP-10
IEC & Green card are issued on the same day of signing the agreement.
STEP-11
Company to submit the List of Plant & Machinery for STPI approval
in order to apply to Customs Dept. for bonding of the Premises.
STEP-12
Company to apply to Customs Dept. alongwith the following documents
for bonding of the premises.
- Bond Application
- affidavit
- stp-aggrement
- B-17 Bond
- Bank Guarantee
- List Plant
& Machinery
- Process
of Manufacture
- Solvency
certificate Stamp
STEP-13
Get the contracts registered with STPI
STEP-14
Contract to be approved by Director
STEP-15
Company to raise Invoice submit to STPI alongwith the Softex Forms
for certification
© Zarana
Khona 2000. zarana@indiaitlaw.com
