In a major relief to Indian information technology companies operating in Australia, Canberra has agreed to amend its domestic laws to stop taxing offshore income of such Indian companies, as part of the free trade deal, leading to savings up to $200 million each year for over 100 Indian IT companies operating in Australia.
The move will correct an oddity in the 1991 Double Taxation Avoidance Treaty (DTAA) between the two countries and enable Indian IT and ITeS players to scale up their operations in Australia, which is expected to have cost Indian IT companies about $1.3 billion since 2012.
However, both the trade deal and changes to domestic Australian tax laws will come into effect once the Australian Parliament sanctions the deal after the general elections due in May are completed in Australia.
Under the provisions of the Double Taxation Avoidance Agreement (DTAA), Australia had been charging tax under the head - ‘royalty’ - from Indian IT companies for offshore work done in India, though the same income was taxed in India as well, generating losses of almost $1 billion for the $220 billion IT industry over the last 10 years.
The DTAA is typically a tax treaty between two or more nations to avoid taxing the same income twice. It kicks in when a tax-payer resides in one country and earns income in another country if those two countries have got into such a treaty.
India and Australia have recently signed an Economic Cooperation and Trade Agreement (ECTA) that seeks to nearly double bilateral trade in the next five years to $45-$50 billion from about $27 billion at present. It also eases norms for collaboration and talent sharing between the two nations.
The Indian IT sector’s total annual revenues from the Australian market are reported to be about $2-$3 billion. About 50% of this business is estimated to be served through offshoring to India. The tax impact on the offshore services income levied at 15% equals to about $225 million annually.
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