India slaps Rs 700 crore tax on Microsoft's arm Gracemac

Published: Saturday 04 July 2015

india's commissioner of income tax says software giant Microsoft owes taxes worth Rs 700 crore in the country. The commissioner of income tax, Sanjay Kumar Misra, asked Gracemac Corporation, Microsoft's Indian subsidiary, to clear the liability for the period 1999-2005. Gracemac is owned by Melinda Gates, wife of Microsoft chairperson Bill Gates.

The department says the company "licences" its software in lieu of money, though it does not "sell" it. Microsoft says its earnings are business income exempt under the Double Taxation Avoidance Agreement (dtaa) between India and the us. The department says licensing a software does not lead to "business income" and hence is not qualified for the tax exemption under the agreement.

Microsoft pays similar taxes in several countries and critics allege the company was avoiding them in India taking advantage of dtaa. "Licence fee is something like a commission. In this case software has not been sold but commissioned; so it is not a business income," says M K Chakraborty, former commissioner of income tax. The department estimates the total royalty income of Gracemac for six years is Rs 2,240 crore, 15 per cent of which should come as tax. The total tax calculations has also included the interests for the tax assessment years.

Microsoft also faces allegations of indiscriminate pricing of software. Its operating system costs us $30 in India, but it sells the same for us $3 in China. Critics say Microsoft feels Chinese system is not strong enough to prevent piracy and selling the software at a cheaper rate helps it check piracy. "India has a democratic system and Microsoft is confident that it will be able to address piracy issues, which they cannot do in China. So, it has kept the prices of its products higher here," says a government official who requested anonymity. Microsoft admits it has different prices for the same product. "Our pricing strategy is aligned to specific geographies and user needs since we believe it's not just cost, but capability that drives adoption and usage of a particular product or service," a company official told Down To Earth.

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