Finance ministry officials feel that software exports being a major foreign exchange earner, any move to tax profits earned by the sector would send out a negative signal to the industry.

There has been a demand from certain sectors that as software exports was doing very well, there was a case for taxing a part of the profit earned by the companies.

Officials said that if the tax exemption to profits from exports have to be removed, it has to be removed from the goods and merchandise first.They added that the benefit available to the software exports can be extended to R&D exports in the budget this year.

Industry associations have asked the Government to include export income derived from R&D activities under the provision of Section 80HHE of the Income Tax Act.

Introduced in 1991, the section relates to I-T exemption on profits derived from software exports.

Officials said that as R&D exports too were earning valuable foreign exchange, there was a strong case for extending the tax exemption benefits to this sector.

At present, companies that derive export income in foreign exchange through R&D activities do not get the benefits granted to export of goods and merchandise. Provisions of Section 80HHC of the I-T Act apply only to profits derived from specified goods and merchandise and not to profits derived from export of services. The companies earning profits from R&D exports, therefore, cannot claim tax exemption under this provision.

The R&D exports don't get benefit even under the provisions of Section 35 of the I-T Act which exempts revenue and capital expenditure incurred by the tax payer for scientific research provided it relates to the company's own business.

If a company derives export income from developing a product that it does not manufacture, the company cannot claim any benefits under this Section.

Similarly, provisions of Section 80IA of the I-T Act apply only to the companies which have scientific and research development as their main job.

Most companies having the potential to earn export income from R&D activities alongwith other activities, therefore, do not fall under this category.

It has been a longstanding demand of the industry to provide I-T exemption to the profits from R&D exports as the potential for earning foreign exchange of the companies engaged in this field will get a major boost from this move.