Tax double whammy leaves software dealers in a fix

New Delhi

June 9, 2008

The Government of India's move to charge additional service tax on packaged
software has left dealers unhappy. While dealers suggested that this would
adversely affect their business, they also indicated that vendors and
distributors need to work together with dealers and make a representation to the
respective government authority to look into the matter.

During the 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. Following the announcement, distributors-including Ingram Micro India,
Redington India and software giants like Oracle and Microsoft levied additional
tax on the license and software update. Now, those licenses that earlier
attracted Value Added Tax (VAT) at four percent, will attract an additional
12.36 percent service tax, which was earlier applicable only on product support.

But vendors and distributors are not willing to do much about the situation,
preferring to play safe. When The DQ Week contacted Oracle the vendor refused to
comment. On contacting Microsoft, a spokesperson mentioned that certain aspects
of the new service tax provisions were not very clear with respect to its
application to software products.

“We intend to work with industry organizations towards getting a
clarification from the government, which has made its clear that it intends to
subject all software to either service tax or excise duty. However, since
service tax paid by both service and manufacturing sectors is generally
available as an input credit, the cascading impact of the new levy should be
limited on our business. We continue to provide our inputs and engage with the
government directly, and through industry forums, such as Nasscom, FICCI,
Assocham etc,” stated the Microsoft spokesperson.

PS Neogi, President, Redington India stated, “We have always maintained
that the local taxes and levies as applicable by the competent authorities
and/or government bodies will be charged as applicable at the time of billing.
This is true for today, as much as it was true for yesterday, and will be true
for tomorrow. Taxation is not a profit activity for us and whatever gets charged
as in a transaction gets deposited in the respective government
treasuries/taxation department.”

Dealers cry foul

No wonder this development has affected software channel partners and
solution providers. Jayessh Mehta, President, Association for IT, Bangalore, “This certainly is bad news for the software channel and will
adversely impact our business. We will raise the concern both at the association
level and with vendors and distributors.”

Saket Kapur, Secretary, Porgressive Channel Association of IT (PCAIT)
mentioned, “This move is creating a lot of confusion and as far as I recall,
during the Union Budget, the Finance Minister clearly mentioned that the tax
would be implemented on customized software. However, the vendors, including
national distributors, are interpreting it in the wrong way and this is a
subject of debate. Software licenses should be considered for service tax only
and not for VAT. Both VAT and service tax can be charged only on works contract
where both services and products are offered. We are at the moment discussing
the issue at the association level and will raise the it both at the government
level and with the vendors and distributors.”

Read full report in The DQ Week edition of June 9-15, 2008