Australia to give up taxing rights under Indian free trade agreement

The ECTA was said to create enormous trade diversification opportunities for Australian producers and service providers bound for India, valued at up to $14.8 billion each year.

One surprising feature of the ECTA was the side agreement for Australia to essentially overturn, by way of domestic legislation, the result of the full Federal Court decision of Satyam Computer Services Limited v Commissioner of Taxation [2018] FCAFC 172. That case held that Australia had taxing rights over certain income (under the tax treaty between Australia and India) derived by primarily Indian offshore IT companies, even though those services were performed offshore, and even where Australia’s domestic legislation did not otherwise impose tax. The case caused considerable consternation in the Indian IT services business community, who had long taken the view that such “offshore income” was not otherwise taxable in Australia.

After several years of lobbying, it appears the Australian government was prepared to essentially give up these unexpected taxing rights. What makes this even more surprising is the current political climate to ensure that Australia gets its fair share of tax from multinational enterprises. This is evidenced by a number of multinational tax avoidance measures enacted in recent years and the previous governments support for a global minimum corporate tax rate, as well as other OECD measures.

To give effect to the intended changes under the ECTA side agreement, Australia will need to amend its domestic legislation. This of course requires normal parliamentary process, but interestingly that process will now be under a new government led by Labour. Just how long that process will take is unknown. It could be some time before such enabling legislation is enacted, and before Indian IT services companies get certainty with respect to their Australian taxation position.

That said, it would be surprising if the newly formed Labour government would walk away from the terms of the signed ECTA.