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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

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Dear Friends, 

I have some basic questions. Is charging VAT and ST on same transactions is permitted? Will not become a double taxation?

By issuing its conclusion in the case and allowing the appeals of the appellants, the hounourable SC in Bharat Sanchar Nigam Limited Vs. UOI states that:

"No one denies the legislative competence of States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow State to entrench upon the Union list and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Art. 366(29A), the value of the goods involved in the execution of the whole transaction cannot be assessed to Sales Tax.".

Moreover the apex court, in para 43, said that:

"The amendment especially allows specific composite contracts viz. works contracts (Clause (b)), hire purchase contracts (Clause (c)), catering contracts (Clause (e)) by legal fiction to be divisible contracts where the sale element could be isolated and be subjected to sales tax."

The Supreme Court has also held in "Imagic Creative (P) Ltd. Vs. Commissioner of Commercial Taxes" that payment of service tax and VAT are mutually exclusive. One transaction cannot be charged to tax under both VAT and Service Tax.

Since the software does not come under the divisible contract under Art 366(29A), we are not supposed to vivisect the contract into material and service portion and charge VAT and ST respectively. However, if VAT and ST are charged at some compounded rates, then there can be a case. Otherwise, it will be against the constitution and against the SC decision in Imagic Creatives.

Please comment

hi james

you may be right, but an Entrepreneur does wants to go into litigation. All this case laws and judgements are very confusing. 

If you thought previous threads, it is clear that if you dont pay  ST/ED + VAT on software sale, then you can be subject to future litigation.

It seems that there is enough cases and laws to justify that service tax + Vat (double tax) is not applicable for License component of software products - however as individual small companies we are not prepared to go into litigation. Many companies are just preventing possible retrospective taxation and hence being careful by double taxing the customer.

This is where a body representing software products should take it up. (service organizations are not worried about this problem)

Anybody from Nasscom listening?

Yes, George, small players cannot afford litigation and chose the way of least resistance by charging the customers. And poor customers bear the burnt.

We all know the present system of taxation is unfair. But who will bell the cat?

Nasscom need not be interested in the end user's plight till it affect the sale of software products!

The customers, being an uninterested party in the taxation issue, cannot go to court directly. What they can do is to hold back that part of the payment to the Software vendor. But how long? Can he withstand the pressure from the vendor as he has to get his license renewed every year?

 

It's a long fight. As long as it does not affect sales, its wasted effort to go to the current Government who doesn't think twice of implementing laws with retrospective effect.

I'm not suggesting we should not try, merely that its better to be prepared for very very long haul.

There is a clarification from Maharashtra Sales tax dept that VAT is payable on total of  Basic Price + Service tax.

The latest update in the form of an educational guide from the service tax department, as of Jun 30th gives some good clarifications. It can be obtained from here. Thank you Sangeeta Gupta from Nasscom for giving it to me and for pointing out some important clauses in there

http://www.servicetax.gov.in/st-edu-guide.pdf

Section 6.4.1 and Section 6.4.4 (page 85) makes it very clear that that packaged software is a good and not a service.

However, I suggest each one verifies with your local VAT/ Service tax office on whats right, since often what Center states and what the State acts may be different.

 

 

 

yes Its clear the package software is not under Service tax, but there as the assumptions. 

a) The software is always provided on Media - with MRP and its shrink wrapped. 

b) If it does not fall under ST , it shall fall under Excise Duty. 

Hope I am correct on this observations. 

 

Packaged Software - packaged for Retail Sale with MRP in Shrink-wrap box is goods - thus attracting Excise/Customs and VAT. But, sale may be subjected to TDS from the customer - due to recent 'royalty' angle clarified in 2012 budget.

But if it is a software license or software update subscription - delivered through Internet or electronic means - then it would be both Goods and Service - thus attracting both Service Tax and VAT. Sale is subject to TDS deduction by the customer.

If it is a Technical Support Subscription (without updates) then it will attract only Service tax. Sale is subject to TDS deduction by the customer.

Good news is that now Multi-level TDS has gone on Packaged Software - by giving a simple declaration on Invoice. (Refer to CBDT Notification 21/2012 dated 13-6-2012)

 

@ Rajesh, Could you clarify where the word 'Packaged for Retail Sale with MRP in shrink wrapped box' is mentioned. Service tax explanations talks only about canned software or packaged software which to me reflects a) permanent transfer of usage rights b) same copy sold to multiple parties.

 

 

Edited Mon, Aug 20, 2012 5:20 PM

Here are the Service tax notifications 02 & 17/2010 dated 27-Feb-2010 (Note that it has a circular cross reference with Excise & Customs Notification 17 & 31/2010). Note the highlighted words.

G.S.R. (E).- In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service providing packaged or canned software, intended for single use and packed accordingly, for the purpose specified in item (v) of clause (zzzze) of sub-section 105 of section 65 of the said Finance Act, from the whole of service tax, subject to the following conditions, namely:-

(i) document providing the right to use such software, by whatever name called, if any, is packed along with the software;

(ii) the importer has paid the appropriate duties of customs on the entire amount received from the buyer; and

(iii) the benefit under notification No. 17 & 31/2010- Central Excise & Customs dated the 27th of February, 2010 is not availed of by the importer.

[F. No. 334/1/2010-TRU]

(Prashant Kumar)

Dear Sir,

I have a question regarding the 'Non-Deduction of TDS' on the amount on sale of Software Licenses in the light of the provisions mentioned in CBDT Notification No. 21/2012 dated 13-06-2012.

In that it is stated various conditions required to be fulfilled by vendor.

This notification mentions about the transfer of software but my question is whether non deduction of TDS is still there in case of Yearly charges asked by Main Company under renewal plans from partners and partners subsequently billing to end customers.?

 

Thanking you.

Jainal Shah

For income-tax purposes, the characterization of the renewal license fees is normally the same as the first time license charges that are paid by a user to the vendor (through the partner). Therefore, it is more likely than not to be classified as "royalty" for income-tax purposes and therefore the renewal charges should also come within the ambit of section 194J of the Act, unless the invoice for the renewal charges clearly states that it is a service fees.

Therefore, the renewal charges will also attract TDS under section 194J and the conditions mentioned in CBDT Notification should equally apply to claim non-deduction of taxes under section 194J.

Disclaimer

This response is based on guidance from BMR Advisors.

The information contained has been obtained from sources believed to be reliable and is intended for general guidance only. This cannot be construed as legal advice and thus disclaims NASSCOM and BMR Advisors from any legal obligation. NASSCOM disclaims all warranties as to the accuracy, completeness or adequacy of such information. NASSCOM shall have no liability for errors, omissions or inadequacies in the information contained or for Interpretations thereof.

 

Edited Wed, Dec 4, 2013 12:28 PM

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