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I-T Dept asks CBDT to clarify non-compete fee
February, 25th 2008
The Income Tax Department has sought clarity from the Central Board of Direct Taxes (CBDT) on non-compete fee, which at present remains mostly outside the tax net.
 
Non-compete fee is a compensation for not sharing knowhow, patent, copyright, trademark, licence, franchise or any other business or commercial right or information or technique used in manufacturing or processing of goods or provision for services.
 
According to income tax officials, Section 55(2) of the I-T Act estimates the cost of right to carry on any business as nil.
 
However, non-compete compensation received by a person carrying on a reputed business is not explicitly covered in the clause right to carry on any business and is claimed as capital receipt. The department has favoured an amendment to Section 28 of the I-T Act to exclude such compensation from the list of capital transactions.
 
The non-compete fee is shown as capital receipt and thus gets exemption.
 
Besides, growth in the knowledge-based industry in India has led the department to propose taxation of new items like intellectual property and activities in e-commerce.
 
Officials say there has been a sudden increase in intellectual property transactions like consultation and creation of art and software, which could be taxed by including them under the purview of tax deducted at source (TDS).
 
A similar view has been taken for e-commerce. Most of these activities, including online booking of tickets, online trading of shares, transactions involving electronic downloading of music, films, technical knowhow, fund transfer and software are currently out of the tax net.
 
Sources said these could not be taxed since a suitable definition of place of control and management could not be established in such cases. Thus, these items could also be bought under TDS, sources added.
 
The growing garments and cloth material business also seems to have caught the attention of the tax authorities.
 
Officials say a large part of such materials are outsourced from small-scale industries (SSIs) and then labelled for retail sale. Tax officials have suggested that these retailers should deduct tax at source and pay these SSIs to check the problem of non-payment of dues.
 
 
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