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Does Service Tax + VAT ? apply on Licensed Software Products Originating from India?
Can anyone clarify the latest position on whether Service Tax also applies for licensed software products originating from India.
Am speciifcally asking its applicability for software products originating from India since imported software products may be billing for service tax for other reasons.
If it is applicable it means that Service + VAT + TDS applies, apart from the numerous other taxes applicable. Isnt this double taxation? Can someone from Nasscom give an answer on behalf of the software product industry? Also requesting those who have found a solution to this (e.g. have consulted experts) to share their conclusions.
Edited Tue, Apr 24, 2012 9:22 AM
Replies to this Topic
George, this is a serious issue.
Finance Bill 2012 has proposed to insert Explanations 4,5 and 6 under clause (vi) of section 9(1) of the Income Tax Act, 1961 ("the Act") with retrospective effect from 1st June 1976. In a nutshell, these explanations inserted now with retrospective effect clarify that any transfer of a license pertaining to the use of software, the consideration will be construed as "Royalty".
This creates several issues for product companies:
- By considering payment made for purchase of computer software as royalty, tax will have to be deducted at source at the rate of 10%, failing which the payer would risk disallowance.
- Computer software in packaged form is generally sold through multi-tiered distribution channels as traded commodity (goods). Gross margins at distribution level are very low, in the range of 2-4%. In many cases, these margins are paid out in the form of commission by the manufacturer of the software and therefore subject to withholding tax under section 194H of the Act. Additional deduction in the form of 10% TDS will cause extreme financial hardship and cause severe strain on the cash flows of the distributors.
- With the proposed amendment, the amount of tax deducted at source will exceed the margins which software distributors earn on sale of software. As a result, they will be reluctant to trade in the product, which will bring the still nascent software product industry to a grinding and abrupt halt.
The easiest way to resolve this is to let the provision about software license being royalty to stay but remove the 10% TDS provision (by adding an additional exception to 104(J)(1). This would take care of the needs of the Indian product companies.
I have been trying to draw attention to this issue so far with limited success.
However, the MNC software companies have taken up cudgels through Software Coalition (see article for more details). They want both the TDS provision and royalty definition to go. If they don't succeed, we will have to go for the smaller change that I have proposed.
@Sharad, Im trying to focus on the impact of this for ISV's creating software from India. Multinationals have the muscle to take care of themselves, and even have the power to bring in international lobbyists to put forward their case. Secondly multinationals pay zero customs duty for imported software, so a little tax wont hurt them.
I would like someone to take up the cause of the the Indian ISV. At 12.36% Service Tax + 5% VAT (In TN) + 10% TDS (since TDS refunds come much later) ISV's in India have huge difficulties in a highly competitive market. I believe that Service Tax is applicable only for Services provided, and not for license component as some people have expounded - however am not sure. The following link is the best expansion of this complicated issue. Unfortunately at the end of it left me with more questions than answers.
We as ISV software product companies need someone to represent us in this - and I do not think much will happen through volunteers. We need someone in the secretariat looking at it from software products perspective and presenting our case well.
This is not entirely a new issue. When software came under service tax, software-in-a-box sellers (like Tally, virus software players, MS Windows/Office boxes at Chroma) were exempt. But the others have been fighting this issue for some time. In fact, ISODA got a special audience with CBDT Chairman on this issue before the budget.
Now that software-in-a-box sellers have been also folded into this TDS arrangement, a broader coalition can be built.
This is indeed an opportunity for NASSCOM to take lead (in partnership with ISODA). I'm pushing for this.
@Sharad - see the following text in the article, as well as the Vat notification in 2003.
"Most packaged software players took the view that, since VAT is levied on the transfer of licenses, service tax could not be levied. This view was also supported by the impact arising out of Notification No. 12/2003, which is still valid and which states that service tax cannot be levied on the value of the transaction representing the sale value of goods"
The issue is not just TDS. Its about Service Tax being applicable for off the shelf packaged products. Why should one pay service tax for Tally?
@George, you're absolutely right that the current "clarification" now pulls everybody into the ambit of this 10% TDS. Software-in-a-box providers like Tally and SaaS players are both victims of this. As it stands today, this clarification will adversely impact both the distributor model and online b2b sales model. (How does a SaaS vendor deduct TDS for somebody paying online? This is non-trivial issue.)
So far the MNCs have been fighting this issue through various bodies like Software Coalition, ISODA, CII and NASSCOM. We need to build a broader coalition to fight this.
I'm hopeful that NASSCOM will step up to lead the charge here. Will know in a few days if that's the case.
@Sharad - TDS is a common issue for all. 10% TDS is deducted if one expects 30% profits and none of us operating in the Indian market get close to that. 2% is what is a more realistic figure and many industries have already got government permission for this across the board.
However I reiterate - the issue I am raising is substantially different - to ensure that product software vendors (packaged box software providers) from india dont have to pay service taxes for the license component. If we do implementation, yes service taxes should apply. This should not be clubbed with the issues that imported product software have since they are paying service taxes for some other reason.
This double whammy of TDS plus service taxes on license will be a telling blow for product software companies from India - and so is a priority.
Let me see if I can add some statements.
George: The current statement of law is, that it is a 'settled matter' that packaged software is 'goods', and therefore attracts Excise Duty and VAT and NOT Service Tax and VAT. The only point of 'confusion' (if it can be called that) is that IF the same software is delivered 'online', then it attracts Service Tax instead of Excise Duty. In either case, VAT remains to be applied, basically because VAT is being charged on the 'right to use' that is being granted to the user. So - since Tally has been referenced mulitple times in this discusson - we pay Excise Duty and VAT for all physical goods, and pay Service Tax and VAT for all online sales.
In effect, there is no fresh concern arising out of the budget - and in fact, the specific mention that 'it is a settled matter that packaged software is goods' was a great statement in it for us.
George/Sharad: Independent of this, the possible interpretation arises from the changes that Sharad talked about. Here, in an attempt to capture in India some portion of the 'direct tax' on the income accrued out of customers in India, the Govt. proposes that Tax should be deducted at source under the head of 'royalty'. When all sections are read together, the change potentially implies what Sharad has written - and can be death knell for the industry. That is actually the only new problem that has arisen in the budget. If we can bring the modification in such that TDS is not required to be deducted for all sale/trade happening locally, and only the process of import could potentially have some withholding tax, everything should be ok. (Of course, this is a statement as an Indian - where I DO believe that some portion of the income arising out of consumption in India should be taxed in India - and its credit available in your home country through DTAA :-))
Thank you very much Sir for the response and sharing what Tally is doing. Being the numero uno in 'Indian packaged products' its great to have this clarity from you directly. It indeed is a relief to know that software licenses are considered 'goods' and not services.
If will be nice if the following sub questions are answered since they are applicable to many of us in the 'packaged product space'
a) What reference can we point to Inspectors to show that packaged software is 'goods'
b) For smaller companies whose turnover is less than 1.5 crores Excise duty is exempt. Does it mean that only VAT is applicable on license?
c) By online sale do you mean full transfer of license or rental in SaaS model. Do Service Tax + VAT apply for both cases? In the SaaS model, since there is no Sale of Goods isnt it only Service tax?
Yes, the royalty issue is important and as an Indian ISV I would prefer the same treatment as what you suggested.
Thank you once again.
For (a) - what reference can be used, please visit http://www.cbec.gov.in/ub1213/do-jstru2.pdf. This is the Explanatory Notes given by the Department on the recent budget. If you read points 5.4.1 and 5.4.4, you will get the relevant reference.
For (b) - what you say may be true. I am not clear of the exemption limits and conditions (for example, is it only turnover, or different turnovers for different business categories) - but if they are exempt they are exempt, and only VAT would be applicable.
For (c) - Service Tax is applicable in ALL cases .. whether it is License or SaaS. In SaaS model, VAT is not applicable since there is no transfer of right of License but only a service delivery, but for License - where the downloaded software embeds a transfer of a right to use, VAT is applicable. (I hope this was not confusing :-)).
Thank you very much for that specific reply. Really appreciate it. I am sure it will help many product software companies including us.
It is really great to have your in-person replies in this forum. The responses are very pointed and of great value to all the product companies!
Thanks George for raising this topic & thanks to stalwarts like Mr Goenka & Sharad for sharing the facts! I am quite clear on this after reading the various comments but I still have 1 fundamental doubt on which I will seek clarity from Mr Goenka. As far as my understanding goes, its that any software which is delivered via any other mode other than a physical CD i.e. either via FTP or downloadable internet link or emails etc will attract Service Tax + VAT if that's a License being sold & like sir said just SaaS then only Service Tax will be leviable. So when we do not sell a software in any physical CD/DVD/pen-drive or any tangible form, Excise won't be applicable in such a scenario, am I correct in my interpretation?
Also, if we do some specific customization for a customer & deliver it online, That customization is done just for that customer so in a sense it adds to the original license sold to the customer. In such a scenario, I think one has to apply Service Tax + VAT, am I correct in this interpretation sir?
Also sir how to treat AMC bills? Just Service tax to be added or along with VAT? As in our case we also give online downloadable patches which adds to the product license & usability during the AMC mode, so will this attract Service Tax + VAT sir?
Last but not the least how to treat Implementation & Training bills? Implementation means we just install & do a usability test of the software at the clients server / client end to ensure it runs smoothly & training bills means we train the users to use the software, I guess in this scenario we should only add service tax, am I correct here sir?
Sorry for so many queries but as you know ERP sales are long & very complex, need your expert help sir :-)
Thanks in Anticipation.
First answer is: yes, any software which is delivered in non-physical form - that is, delivered electronically - comes under the ambit of Service Tax instead of Excise Duty.
Second scenario of delivering upgrades electronically - since no new 'license' is being transferred, would attract only Service Tax and not VAT.
AMC also would attract Service Tax and not VAT for the same reasons - since no new License is being transferred.
Training & Implementation are pure services, and would attract only Service Tax.
Basically - only when a License is sold, does VAT come into the picture. The rest of all scenarios are between Excise Duty (if goods), and Service Tax (if services). The 'ambiguity' of 'goods being delivered electronically' is specifically called out and covered under Service Tax.
Hope this helps.
The most significant point that Mr Goenka pointed out is the software license (in physical form as an off the shelf product) is a good and not a service after the clarification by the government. I am repeating the reference below
" http://www.cbec.gov.in/ub1213/do-jstru2.pdf. This is the Explanatory Notes given by the Department on the recent budget. If you read points 5.4.1 and 5.4.4, you will get the relevant reference".
Once that ambiquity is settled it means many things as far as I understand
* VAT/ Excise Duty (if applicable) applies to software licenses and not service tax
* TDS should not apply on license component, since TDS is applicable only on Services (however the Income Tax authorities may not have accepted it yet, and this is the point that Sharad was Indicating and impacts all software product vendors, multinational product vendors as well as distributors of software products)
* All other service aspects like customizations, consulting, AMC, and any other work we do for customer is Service Taxable and hence TDS also applies
However to prove that it is a tangible good, we need to be sure it is a product that runs on its own without services, is self installable, has documentation and other such attributes of an off the shelf product.
Edited Fri, Apr 27, 2012 10:46 AM
Sir Goenka - After reading your crystal clear reply & explanation I can now finally claim that am 'INDIAN TAX LITERATE' :-)
An update: It seems that Service Tax department is willing to consider packaged software products which has an MRP written and no services provided along with it as a 'good'. - e.g. Tally and Anti virus software.
However ERP style software products, on which implementation and adaptation services are provided, are considered services, even though it is packaged and out of the box.
Looking forward to the experience of other packaged application providers on this issue.
The specific call out which is there, is that those 'products/packaged software' which conform to the Legal Metrology Act (erstwhile Weights & Measures Act) are eligible to be classified for Excise, otherwise they will attract Service Tax. The Legal Metrology act requires MRP to be written - therefore your conclusion is right.
Both these are 'central taxes' - and I do believe that giving an unambiguous boundary condition has been a good thing.
Unfortunately, VAT is a 'state subject' - and are not governed by central interpretations. There, the reason why VAT is applicable for all transfer of 'right of use' - whether or not they are under Legal Metrology or not.
So - yes, if you are selling an 'out-of-the-box' product which attracts Service Tax for the above reasons, you WILL require to charge VAT.
This is true even for those 'packaged products' (like Tally) which are sold online - since online sales do NOT conform to Legal Metrology! There we DO charge both Service Tax AND VAT (something I covered in my earlier statements on the subject)
Thanks for the reply Mr. Goenka. My question was to find out if service tax should apply for the packaged part of an Enterprise Application Delivered in a CD (not services).
Lets say you have a packaged, out of the box ERP product. It is delivered in a CD. Within a short period you also provide services around the product. How will the tax apply.
Based on all what I read here as well as most of the rulings, it seems we should apply VAT + Excise Duty on the packaged part and Service tax on the services around it. By billing two seperate invoices for the package and the service, you are esssentially seperating both.
However both Akshay, and me are confirming that Service Tax wants Service Tax (and hence TDS applies) on the packaged part also. Since there are number Enterprise Application packaged vendors here, I am asking for what others are doing. In my opinion Service Tax should not apply on the packaged, out of the box product, if it is a permanent sale/ transfer of usage rights.