INTRODUCTION India has witnessed rapid growth in the field of information technology and as a result, business process outsourcing and bioinformatics industry have developed. This has further led to an increase in Indian companies purchasing software from foreign companies. TYPES OF SOFTWARE There are two types of application software that are created depending on the needs of the parties: packaged or boxed software or custom software. In the case of shrink software, it is not created specifically for a particular consumer and an Indian company can license it. It is easily available in the market i.e. Tally packages, Windows, Microsoft Office, etc. In this case the property is retained by the developer. On the other hand, custom software is specially created to meet the special needs of a customer based on their preferences. and expectations. In the case of custom software, ownership of the software may or may not remain with the software developer. Before we begin, it is imperative to define what we mean by software. Under the Indian Income Tax Act, 1961, software has been defined as: (a) any computer program recorded on any disk, tape, punched media or other information storage device; or (b) any personalized electronic data or any product or service of similar nature as may be notified by the Central Board of Direct Taxes, India. Section 2 (ffc) of the Indian Copyright Act, 1957 defines “Computer Program” as a set of instructions expressed in words, code, diagrams or any other form, including in machine readable medium, capable of causing a computer performs a particular task or achieves a particular result. Therefore it can be said that the word software is... at the center of the paper... as business income. However, in cases where the consideration paid gives the right to commercially exploit the intellectual property of the software, then it would amount to a royalty. Furthermore, the government should clarify that changes to the law relating to software taxation would have no impact on treatment under the DTAA. To provide further clarity on the issue, the Government could also publish a White Paper to discuss with interested parties and clarify the tax treatment of software payments. CONCLUSION It is essential that a country's economy has simple and unambiguous tax provisions so that taxation laws can be implemented smoothly and prevent tax evasion. It is urgent for the government to clarify all issues related to software taxation and bring relief to the exponentially growing software trade and industry.