Australia Trade Deal: A Tax Win That India Should Cautiously Enjoy

In a rather unusual development, India’s commerce ministry has been able to secure a significant win for the IT services sector in the trade agreement with Australia.

The two countries have exchanged a letter of understanding that Australia will amend its domestic tax law for the benefit of Indian firms providing offshore technology services. While this outcome is beneficial for India, it opens the door for other countries as well to negotiate tax positions in trade negotiations.

Typically, trade agreements are limited to negotiations on tariffs for goods and services, Rahul Shukla, partner at PwC, said. While trade remedial measures have been part of these agreements, addressal of direct tax issues didn't find a place in them. Usually, concept of national treatment, exception and dispute mechanism form part of trade in services, Shukla explained.

This is the outcome of a side letter in a trade negotiation which is quite significant, Ajay Rotti, partner at Dhruva Advisors, said. Some estimates peg the impact of this development at over $200 million a year, he added.

The Australian government has agreed to incorporate this understanding in the Economic Co-operation and Trade Agreement.

The issue first arose in 2018 when Australia’s federal court interpreted the country's double tax treaty with India in the case of Satyam Computer Services. It held that payments for technical services, software development, etc., provided by an Indian resident to an Australian payer will be taxable in Australia.

It will be interesting to see if India will entertain any tax concessions in its ongoing trade negotiations with other countries, Rotti added.