Will tax keep pace with changing technology? Going by recent trends, at least in India, Zenobia Aunty thinks the pace of keeping up is sluggish. "I hate a slow Internet connection," she wails, as she waits for her Internet connection to come to life. She adds, "But what I hate even more is the lack of clarity in tax land. Technology grows at a very fast pace and tax legislatures are not able to cope up.

Yes, judicial decisions will vary based on the facts of each case, but the issue of tax imposition on import of shrink wrapped software, needs to be dealt with once and for all." A recent news item caused her a lot of anguish. The Karnataka High Court has recently held that import of computer software would result in transfer of a copyright and the payment made to the foreign supplier would be in the nature of a royalty payment.

Thus, the Indian buyer would have to withhold tax on the same, both as per the Indian Income-Tax Act and the relevant tax treaty. Transfer of a copyright article, such as shrink-wrapped software, ought not to result in a royalty payment.

It is similar to buying a book off the shelf. Zenobia Aunty is given to understand that the high court, in the given case, observed that the right to make a copy of the imported software and use it for internal business, store it on hard disk of designated PCs and take a backup would amount to copyright under Indian Copyright Act. It was actual transfer of part of a copyright, rather than an outright sale of a copyright product. Hence the need to classify it as royalty that both you and I know suffers a withholding tax in India.

In the past, there have been several rulings of tax tribunals and Authority of Advance Rulings that have appreciated that a distinction needs to be made between a copyright right and a copyright article for the purpose of characterisation of computer software transactions. In case the transaction is held to be a sale of a copyright right, then unless and until the foreign supplier has a permanent establishment in India, India cannot tax the payment, which constitutes business income. The issue of withholding tax on import of computer software is a hotbed of litigation across the world.

Zenobia Aunty spoke to experts who point out that a few countries have taken a clear stand and do not advocate imposition of withholding tax at source, either owing to the existence of clear-cut guidelines or practice adopted by the tax authorities and the judiciary.

Broadly, these include countries such as Singapore, US, UK and Australia, to name a few. On the other hand, countries such as China and India seem to have adopted an ambiguous stand with divergent views on the same issue. Ambiguity doesn't help. It would have been better if the Supreme Court had resolved this issue once and for all. Or if the Central Board of Direct Taxes had issued some clearcut guidelines for the tax authorities to follow. Or better still, if the Income-Tax Act itself provided a final answer.

While a foreign tax credit can be availed of in the home country (foreign supplier's country) if tax has been legitimately withheld at source in the other country, it can be cumbersome to get a foreign tax credit if tax has been presumed to be wrongly withheld.