Circular No. 588

What it does

Takes systems software supplied with hardware out of Indian tax in the hands of the foreign supplier, for software exporters. Following the Finance Minister's statement in the Lok Sabha on 7th September, 1990, that a lump sum payment for systems software supplied by the manufacturer along with the hardware would bear only customs duty and not income-tax, while application software forming part of an approved software export scheme would bear only income-tax on the licenser or seller, the Board decides that the income-tax limb of the concession applies to imports made in the current financial year and subsequent years. So where a taxpayer in the business of export of computer application software imports systems software supplied by the hardware manufacturer along with the hardware, the lump sum paid to the foreign supplier for any right in or use of that software is not taxable in India as royalty or otherwise, and may be paid without deduction of tax at source under section 195(1). The circular records that the necessary amendment of the law would be introduced before Parliament shortly.

Why it was issued

To remove the dual levy on software exporters, who were bearing customs duty on the software as a commodity import and income-tax on the royalty paid to the non-resident licenser or seller.

Who it reaches

Exporters of computer application software importing hardware
Foreign manufacturers supplying systems software bundled with hardware
Banks and deductors remitting lump sum software payments abroad

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.195	s.393, s.395, s.397, s.400

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

1162. Announcement by Finance Minister in Lok Sabha on 7-9-1990 regarding deduction of tax at source from payments in respect of systems software
1. In his statement made in the Lok Sabha on September 7, 1990 the Finance Minister had, inter alia, announced :
"At present, customs duty is levied on the value of computer software by treating it as a commodity import. The non-resident licenser or seller is also subjected to income-tax on royalty payment for licensing of the software. To avoid this dual levy for exporters, Government has decided that lump sum payment for systems software supplied by the manufacturer along with the hardware itself would be subjected only to customs duty and not to income-tax. Application software forming part of an approved software export scheme would be subjected only to income-tax on the licenser or seller."
2. It has been decided that the concession, as above, insofar as it relates to income-tax, will be available in relation to imports made during the current financial year itself and subsequent years. Accordingly, where a taxpayer, engaged in the business of export of software for computer application, imports any systems software, supplied by the manufacturer of the computer hardware, along with the hardware itself, the lump sum payment made to the foreign supplier for acquisition of any right in relation to, or for use of, such systems software will not be liable to tax in India as payment by way of royalty or otherwise. Such lump sum payments will, henceforth, be allowed to be made without deduction of tax at source under section 195(1) of the Income-tax Act, 1961. Necessary amendment of the law in this regard will be introduced before Parliament shortly.
Circular : No. 588, dated 2-1-1991.

What to watch

Every limb of the description must hold: the payer must be in the business of exporting software, the software must be systems software, and it must be supplied by the hardware manufacturer along with the hardware itself.
Application software is outside the relief on the income-tax side; on the Minister's statement it bears income-tax on the licenser or seller.
The circular anticipates an amendment of the law that had not yet been made when it issued; the statutory position has moved on since in terms this text does not carry.

Where you meet it

In a remittance certificate or a section 195 proceeding on a lump sum payment for bundled software, and in an assessment of the non-resident supplier.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 15/2019 — Issues in respect of payment of third installment under the Income Declaration Scheme, 2016- clarification on certain pr 12 July 2019
Notification 59/2017 [F. No. 370 142/8/2017-TPL] / GSR 826(E) — Ministry of Finance 4 July 2017
Notification No.31/2016 [F. No.370142/3/2016-TPL]/SO 1655(E) — [To BE Published in the Gazette of INDIA Extraordinary, Part II, section 3, Sub-section (ii)] 5 May 2016
Notification: 21 Date of Issue: 13/6/2012 — [To BE Published in the Gazette of INDIA, Extraordinary, 13 June 2012
Press Release — CBDT clarifies "Vodafone was warned" 2 May 2012
Circular No. 7 — Section 239 of the Income-tax Act, 1961 - Refunds - Procedure for Refund of TAX Deducted at Source under section 195 to 27 September 2011

← Circular No. 589 · Circular No. 587 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.

What this is