Indian IT majors such as Tata Consultancy Services (TCS), Infosys, and Wipro among others got a shot in the arm with Australia agreeing to amend its domestic tax law to prevent the taxation of offshore income of Indian companies as part of the free trade agreement signed on Saturday.
With this, more than 100 tech companies of India working in Australia can save up to $200 million annually.
It is important to note here in this context that Indian IT companies lost more than $1 billion in taxes in the last 10 years due to existing provisions in the Australia-India double taxation avoidance agreement (DTAA). Australia had been charging tax under the head – ‘royalty’ – from these firms for offshore work done in India, and the same income was taxed in India as well.
“The Government of Australia has agreed to amend the domestic taxation law to stop the taxation of offshore income of Indian firms providing technical services to Australia. This will resolve the issue that the Indian government has raised about the DTAA between the two governments for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income,” an unnamed commerce ministry official told Business Standard.
However, both changes in the trade agreement and domestic Australian tax laws will come into effect when approved by the Australian Parliament. And, this will happen only after the formation of a new government in Australia after the May general elections.
Worth mentioning here is that a DTAA is a tax treaty signed between two or more countries. And its main purpose is to shield taxpayers from paying two taxes on the same income. Also, it makes the country an attractive investment destination by providing relief on dual taxation.
The 1991 misuse of DTAA between India and Australia resulted in Australian authorities taxing Indian companies’ overseas earnings, which were being shown as royalty income. For example, if an Indian IT company has an Australian client and 50 per cent of its work is being done in Australia and 50 per cent in India, then the Indian part was getting doubly taxed both in Australia, as well as in India. In 2018, Tech Mahindra had lost its appeal against the tax levy in an Australian court.
“Thank you so much to the Govt of India and to Nasscom for resolving the critical and long-standing Australia tax issue. The perseverance paid off!” Wipro chairman Rishad Premji said in a Twitter post on Sunday.
As per industry estimates, Indian IT companies generate business revenue of roughly $4-8 billion from Australia each year.
According to the Australian Trade and Investment Commission, or Austrade, during the last decade, five of India’s top IT companies—Infosys, Wipro, TCS, Tech Mahindra and HCL Technologies—have expanded business and partnered with many of the top 100 companies on the Australian Securities Exchange, including National Australia Bank (NAB) and energy company AGL. the publication mentioned.
Since 2011, Indian companies have made significant investments in infrastructure, human resources, new services and information and communications technology when the Australian government started to woo Indian companies.
