ISODA Seeks Solutions For Software Service Tax

For long now, software distributors, resellers, system integrators, solution
providers-in short, everyone involved in the trade of software products have
been going through trying times. With the multiple layers of taxes that are
levied on this product category, no one has clarity on what is the exact nature
and amount of tax to be paid in this trade.

In a bid to resolve matters pertaining to taxation imbalance and discuss ways
to get rid of the current service tax issues, Infotech Software Dealers
Association (ISODA) held a meeting in Mumbai. The event witnessed participation
of around 20 members. Both software partners and vendors were unclear whether
software should be treated as goods or services. Generally, the assumption is
that it is a combination of both goods and services.

Currently, partners apply service tax/VAT depending on their understanding
about the software. But they are worried that they might end up in the tax
dragnet in near future. This further adds to the confusion, since the government
has directed software partners to deduct Tax Deducted at Source (TDS). This has
prompted the software reseller community to unite and come to a consensus, where
they decided that software when treated as a physical product would attract
service tax. Hence, the real confusion residing in the minds of the software
reseller community is that a single transaction cannot attract both VAT and
service tax.

At the recently-held ISODA event in Mumbai, channel partners met to discuss software taxation issues that are increasing becoming confusion for resellers

Where did the confusion start?

The entire issue started when the Supreme Court passed a law in which it
stated that software had to be treated as goods. Hence, the center would charge
excise duty on these goods in 2004. There was no provision for service tax
around that time. The concept of service tax gradually came into picture post
the above declaration.

Hence, a software reseller was either liable to pay sales tax on the software
package (on the condition that it is being treated as good), and if not, then he
would have to move out of the industry. Hence, TCS approached the Supreme Court
and stated that when a CD with software is sold, what a partner is actually
selling is a programmer with a skill.

Since it was not a tangible product and hence a good, the Supreme Court went
into the characteristics of the software. Now since sales tax was being
collected by the state government, the central government also wanted its share
of revenue and started levying excise duty. So as per the court, when a software
is copied on a CD or any media, the act of copying is defined as
'manufacturing'.

Later the court defined the software into two parts-the standard software and
the customized software. Standard software, would be liable for an excise duty
at the rate of eight percent, and customized software would be exempted from any
form of tax, and hence there will be no excise duty levied. "The central
government has missed the important methodological transaction of this industry.
The government defined manufacturing as the process of copying the software on
the CD. Generally, a software is electronically downloaded or one master copy is
given to the reseller," stated Sunil Gabhawalla, Chartered Accountant and member
of ISODA. When taken in the form of physical media (where a buyer gets a CD),
the software would attract both excise duty and VAT. But when downloaded
electronically or accepted in the form of paper license, it would attract only
VAT and no excise duty.

However, the above judgment did not satisfy the government's need and hence
it decided to challenge the order passed by the Supreme Court.

The government's stance was that TCS's judgment defined software to be good
but only in a case where software is recorded on a media. The central government
hence went ahead and interpreted that if software is not recorded on a media, it
is not a good but a service. This development led to the formation of ISODA by
the government.

According to government's assumption, if delivered electronically, software
is liable to attract service tax. Most of the distributors found it favorable
for them to pay, since during Union Budget 2008, the government of India had
announced that additional service tax would be charged on IT services with
effect from May 16, 2008. Hence, those licenses that earlier attracted
value-added tax (VAT) at a rate of four percent, started attracting an
additional 12.36 percent service tax, which was earlier applicable only on
product support.

The distributors including vendors were on the safer side, since for them
transactions happened in dollar prices, and they were not to get affected by the
intricacies of taxation. Hence, they did not protest. Hence, the distributors
started charging service tax and the dealers had to forcibly follow the
footsteps of the distributors.

Several partners also questioned whether the copyright part was of relevance,
when a software was in question or the program uploaded on the CD. Yet another
point that was widely debated was around maintenance contract, wherein periodic
upgrades are a part of that maintenance software. Gabhawalla also shared that
ISODA had filed a petition in the Chennai High Court, challenging imposing of
service tax on packaged/canned software. They were previously declared as goods
with VAT charges. During the discussion, Gabhawalla mentioned that he himself
does not agree for applying of service tax and that vendors need to be
permissive and decide whether it is goods or services.

The wait for GST

Clarifying more on the Goods and Services Tax (GST) issue, Gabhawalla said
that the government has still not decided on the dates when GST would be
applicable in India. It had announced earlier that the dates would be April 1,
2010, which was extended to Oct 1, 2010, and again postponed to April 1, 2011.

Gabhawalla also highlighted the impact of Central Goods and Service Tax (CGST)
and States Goods and Service Tax (SGST), and explained the broader perspective,
that the revenue collected from CGST will belong to the center and SGST will
belong to the states.

While the two taxes are levied on every transaction, it is expected that
basic features such as charge ability, definition of tax payer, valuation,
classification and so on will be similar across the states and the center.

Minakshi Shetty

minakshis@cybermedia.co.in