Australia Trade Deal: A Tax Win That India Should Cautiously Enjoy
In a rather unusual development, India’s commerce ministry has been able to secure a significant win for the IT services sector in the trade agreement with Australia.
The two countries have exchanged a letter of understanding that Australia will amend its domestic tax law for the benefit of Indian firms providing offshore technology services. While this outcome is beneficial for India, it opens the door for other countries as well to negotiate tax positions in trade negotiations.
Typically, trade agreements are limited to negotiations on tariffs for goods and services, Rahul Shukla, partner at PwC, said. While trade remedial measures have been part of these agreements, addressal of direct tax issues didn't find a place in them. Usually, concept of national treatment, exception and dispute mechanism form part of trade in services, Shukla explained.
However, inclusion of a specific direct tax matter on offshore services in a free trade agreement may lead to similar requests coming India's way requiring inter-ministerial consultation.Rahul Shukla, Partner, PwC
This is the outcome of a side letter in a trade negotiation which is quite significant, Ajay Rotti, partner at Dhruva Advisors, said. Some estimates peg the impact of this development at over $200 million a year, he added.
"The Government of Australia has agreed to amend Australian domestic taxation law to stop the taxation of offshore income of Indian firms providing technical services to Australia." - Ministry of Trade, Australia
The Australian government has agreed to incorporate this understanding in the Economic Co-operation and Trade Agreement.
TCS, Wipro, Infosys — all Indian IT companies providing services in the Australian market will benefit from this.Ajay Rotti, Partner, Dhruva Advisors
The issue first arose in 2018 when Australia’s federal court interpreted the country's double tax treaty with India in the case of Satyam Computer Services. It held that payments for technical services, software development, etc., provided by an Indian resident to an Australian payer will be taxable in Australia.
Most Indian companies were disputing this position in Australian courts and the tax office. Since the matter was under dispute, most didn’t even claim credit in India for taxes paid in Australia on this issue. Later, Australia even came out with a settlement scheme, which was availed by some of the smaller Indian IT companies.Ajay Rotti, Partner, Dhruva Advisors
It will be interesting to see if India will entertain any tax concessions in its ongoing trade negotiations with other countries, Rotti added.