India-Australia ECTA all set to end double taxation for Indian IT firms
May 30, 2022
India signs a trade deal with Australia through which Indian IT companies will get double taxation relief as well as boost their IT Services space in Australia.
In a major relief for the Indian IT sector, India and Australia signed an Economic Cooperation and Trade Agreement on 2 April 2022 whereby Australia has agreed to amend its domestic tax laws to stop taxing the offshore income of Indian IT firms providing technical services to Australia.
Upon ratification by the Australian parliament after the recent general elections, the amendment will resolve the double taxation issue raised by the Indian government wherein the income earned by Indian IT firms providing offshore services to Australia was taxed in both the country of residence and country of source.
Post the parliamentary ratification, this amendment will significantly benefit the Indian IT sector which had been adversely impacted by the ruling of the Federal Court of Australia in 2018 to uphold the Australian Tax Office’s levy of tax on income from certain offshore technical services provided by an Indian company to its clients in Australia.
Applicable provisions of the Income Tax Act in India provide that in case an assessee is eligible to claim the benefits of a tax treaty entered into with a particular country, the beneficial provisions of the tax treaty and the Income Tax Act will apply. However, tax treaties in Australia are incorporated into Australian international tax agreements, and taking the benefit of the Act, all treaty provisions are imported into Australia’s domestic tax laws which become applicable to resident taxpayers of the treaty country.
Australian tax authorities were taxing the offshore income of Indian IT companies as Royalty under Article 12(3)(g) of the said DTAA - precedence set after the decision of 2018 in the case of Tech Mahindra.
After the Federal Court’s 2018 decision, the Indian IT sector had been struggling with the consequences of higher taxes in Australia, the availability of tax credit, and the adverse impact on their businesses for overseas services. Various representations had been made to the Indian government to resolve the issue. Hence, Australia’s commitment to resolving it now through changes to their domestic law is a welcome development for the Indian IT service sector.
Last updated: 30/05/2022
Article contributed by:
Associate Director - Direct Tax
