Welcoming the government's decision to do away with multi-level TDS on software, industry body Nasscom said the move will benefit the IT sector and improve finances.

The issue of 10 per cent tax deduction at source (TDS) was applicable at every level of software distribution chain, right from master distributor to reseller to channel.

"This was leading to an unsustainable model for software distributors who operate on very low margins. TDS deduction was leading to cash flow issues for the dealers as well as increase in cost of software as dealers could not afford funds getting locked in for long durations," Nasscom said.

Nasscom President Som Mittal said the announcement will help alleviate industry's concerns on the issue.

Finance Minister Pranab Mukherjee today said he has constituted an advisory group to deal with international taxation, especially multi-level TDS on software companies.

"I have constituted an advisory group to resolve various issues in the area of transfer pricing and international taxation. The group has held its first meeting on May 25. On advise of group and Nasscom, I have approved issuance of a circular to avoid multi-level TDS on software under section 194 J (of the Income Tax Act). This will remove hardship in case of software distributors," Mukherjee added.

Section 194-J of the I-T Act deals with fees for professional and technical services and covers royalty and non-competence fees.

Multinational companies resort to transfer pricing to shift profits from high-tax countries to low-tax jurisdictions with a view to reducing overall tax liability.