VAT and Service Tax on License part of the Customised Software

Just want to share a query which a company had with the community. Probably more insights can be provided by people out here:

Query from member

We would like to have clarification from NASSCOM on the applicability of VAT and Service Tax on customised software.Please forward our query to the relevent section of your organisation for the clarification.

VAT and Service Tax on License part of the Customised Software

During the F.Y. 2007-08 off the shelf software or packaged software got covered under Central Excise and a levy of 8% was charged on the sale of off the shelf/packaged software. However customized software were exempted from the Central Excise. Software services were also exempted from service tax up to the F.Y. 2007-08. However VAT/CST was there on the off the shelf/packaged software and even on the license part of the customized software.So the situation was like this

Customized Software- F.Y. 2007-08

VAT/CST As per the prescribed rates on the license part of the software
Service Tax Nil
Excise Duty Nil

However w.e.f. F.Y. 2008-09 service tax is made applicable on the customized software including the license part of the customized software.Additionally VAT/CST is also applicable on the license part of the customized software. So there is a dual tax in the form of VAT/CST and Service Tax on the license part of the customized software. Companies like Oracle etc are charging both VAT and Service tax on the license part of their software.

Now the question is whether it is right to charge both VAT and Service Tax on the license part of the customized software?

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I checked with some of the experts and here are some views:

There  have  is some confusion on this and even NASSCOM is seeking due clarifications on this.

"Similarly, I propose to increase the excise duty on packaged software from 8 per cent to 12 per cent to bring it on par with customised software which will attract a service tax of 12 per cent."
Budget Speech, Finance Minister

GOVERNMENT COMMUNIQUÉ

- Ref: D.O. F. No.334/1/2008-TRU dated New Delhi, 29th February, 2008

4.1.2 Software consists of carrier medium such as CD, Floppy and coded data.
Software's are categorized as "normal software" and "specific software". Normalised software is mass market product generally available in packaged form off the shelf in retail outlets. Specific software is tailored to the specific requirement of the customer and is known as customized software.

4.1.3 Packaged software sold off the shelf, being treated as goods, is leviable to excise duty @ 8%. In this budget, it has been increased from 8% to 12% vide notification No. 12/2008-CE dated 01.03.2008. Number of IT services and IT enabled services (ITeS) are already leviable to service tax under various taxable services:

4.1.5 Software and upgrades of software are also supplied electronically, known as digital delivery. Taxation is to be neutral and should not depend on forms of delivery. Such supply of IT software electronically shall be covered within the scope of the proposed service.

Now there can be multiple interpretations to this.

While the statement tend to demarcate between the customised and packaged shelf it is a matter of interpretation as to whether the cost of packaged software includes some sort of customisation as we all know that a plug and play might not be possible in all situations. If the cost of software does not include the customisation( read the services part ) then the service tax might imply only for the portion of the services that the vendor is undertaking for customisation and not the product, but if it is build up in the cost then only the VAT will apply.( My personal understanding)

Further it appears from the both the statement and the communiqué that the interpretation has to be "either" and not "and" meaning that you need to pay either VAT or Service Tax on individual components and both cannot be charged on the same component. ( My personal understanding)

I think it will be a good idea for the member to take a breakup from the vendor about the license charges i.e. how much is for the license and how much for the support or customisation and then they can have an understanding as to much VAT and how much service tax they need to pay. For one thing appears for sure that the while the taxation might be broken among Service Tax and VAT it in no way states double taxation on the entire amount( My personal understanding)

However as stated we are seeking further clarification from Ministry of Finance in this regard and once we have that we could intimate it to the industry
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Replies to this Topic

Avinash,

Thanks for posting this! This is an important issue that needs quick answer from the Finance Ministry ASAP!

Suresh

I was recently at the Microsoft Partner Summit and a senior Partner from KPMG gave a presentation on this issue. From what I could gather as per the interpretation, we have to charge Service Tax and VAT on software licences . On services rendered for customisation/ implementation only service tax is leviable. 

I also had an opportunity to attend a meeting of ISODA , a new association of Software Dealers in India who are quite active in consulting the various revenue departments to seek clarity on this issue. They also confirmed that they are just confused and are facing lots of difficulties with consumers and distributors of packaged software.

HP has come out with a communication ( edited ) 

“Information Technology Software” Services are brought into Service Tax net with effect from 16 May 2008.  The taxable service definition covers service provided to any person, by any other person in relation to information technology software for use in the course, or furtherance, of business or commerce, including

1.           Development of information technology software, study, analysis, design and programming of information technology software;

 

2.           Acquiring the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software;

 

3.           Acquiring the right to use information technology software supplied electronically;

 

Information technology software is defined as “any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of an automatic data processing machine”

 

This would obviously cover both packaged software and customized software.

 

Packaged software is defined as:   “a software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold, off the shelf.”

 

Customized software is defined as “any custom designed software, developed for a specific user or client), other than packaged software or canned software”

 

Basis the above changes in the Statue, HP will be charging Service Tax over and above the VAT / CST currently applicable on Licenses with immediate effect.

 

As per the expert from KPMG, every single transaction needs individual analysis and if you can maintain documentation, on what and why you are charging, there could be a way out . It is also very clear that a WRIT petition will be filed by organisations and individuals challenging this practice. 

As usual, this is going to take away a lot of energy and time when convincing customers for large licence sales.

 

 

 

 

 

Edited Fri, Sep 19, 2008 7:27 AM

For last 20 years or so, Sales Tax (VAT) has been payable on the sale of Packaged Software products. However, with introduction of section 65(105)(zzzze) in Service tax w.e.f. 16-5-2008, there has been a confusion as to whether Service tax is also payable on the sale of packaged software products; apart from the usual VAT.

ISODA (Infotech Software Dealers Association - www.isoda.in) has filed a writ petition in Madras High Court seeking clarification on the applicability of Service Tax on the Packaged software delivered in various forms viz., box product, paper license and internet download. 

Rajesh Kothari

There is a cover story on the "tax mess" by Computer Reseller News (CRN):

The Great Indian Software Mess

http://www.crn.in/The-Great-Indian-Software-Mess-Cover-Story-001Dec009.aspx?utm_source=newsletter&utm_medium=email&utm_campaign=161209

Also, you can get more information at my personal blog:

Slow, steady and sure death of the Packaged Software Industry in India

http://rjkothari.blogspot.com/2009/11/further-confusion-with-service-tax-on.html

Rajesh Kothari

Profile Image for prasad K. prasad
  • Mon, May 17, 2010 1:38 PM

Dear Members

I want to share my thoughts on the applicability of excise duty/service tax on packaged software after the recent budget where notification no.2/2010 of service tax and notification no.17/2010 of central excise were issued. This is analysed more from the perspective of whether a SSI can still avoid payment of duty (if the turnover is within the threshold exemption limit of Rs.1.5 crores) and avoid service tax by taking shelter under Notification 2/2010 which was introduced w.e.f February 27, 2010 whereby it says "taxable service" as referred to in clause V for packaged software intended for single use shall be exempt

provided:

a) the document providing the right to use is packed along with the software;

b) the manufacturer or person holding the copyright has paid appropriate duties of excise on the entire amount received from buyer and

c) benefit under notification no.17/2010 of central excise is not availed.

Notification No.17/2010 of central excise provides for exemption of excise duty on packaged software provided the person providing the right to use makes a declaration to commissioner of central excise regarding the consideration paid or payable and such person should be registered under service tax authorities.

By reading the above notifications together, what we infer is - they are inter linked - ie the law wants us to either get us covered under excise duty or service tax.  The tricky part in notification no.2 is it says that the packaged software shall be exempted from service tax if we have paid appropriate amount of excise duty and also says we should not take benefit of notification no.17/2010 ie we should not claim exemption of excise duty. 

As we are all aware, excise duty is applicable on a product and not for a service. However, monetary impact will be the same whether we pay excise duty or service tax.   

As the words "appropriate duties of excise has been paid" is used, we cannot take any benefit of SSI registration also for SMEs, wherever applicable.

THE SUPREME COURT in "COLLECTOR OF C. EX., VADODARA Vs DHIREN CHEMICAL INDUSTRIES has held - The only question that we are concerned here relates to the correct interpretation to be placed upon the phrase "on which the appropriate amount of duty of excise has already been paid".

An exemption notification that uses the said phrase applies to goods which have been made from duty paid material. In the said phrase, due emphasis must be given to the words "has already been paid". For the purposes of getting the benefit of the exemption under the notification, the goods must be made from raw material on which excise duty has, as a matter of fact, been paid, and has been paid at the "appropriate" or correct rate. Unless the manufacturer has paid, the correct amount of excise duty, he is not entitled to the benefit of the exemption notification.

Based on this judgement the department also issued a circular No. 667/58/2002-CX., dated 26-9-2002 clarifying the position on appropriate duty has been paid means duty has to be paid and no exemption can be taken.

Thus, the issue to the extent of central levy is concerned, seems to have been settled that we may have to pay either excise duty or service tax on Packaged software. 

Having said this, the position as to whether VAT which is a state levy and Excise duty which is a central levy can both be applicable for packaged software still remains unresolved.

Any other views from the members?

Thanks

Prasad

 

Two questions were raised in Lok Sabha on the subject - details given below:

1. GOVERNMENT OF INDIA
MINISTRY OF FINANCE
LOK SABHA
UNSTARRED QUESTION NO 4834
ANSWERED ON 18.12.2009
INCLUSION OF CUSTOMISED SOFTWARE INTO SERVICE TAX NET
4834 . Shri SANJAY BRIJKISHORILAL NIRUPAM

Will the Minister of FINANCE be pleased to state:-

(a) whether the Government has included the `Right to Use` portion of Packaged Software products under list of taxable services under section 65(zzzze) of finance act 2008 and subsequent amendment in 2009;

(b) if so, the details thereof and the reasons for the same;

(c) whether the Government has taken any steps to ensure that the State Government no longer charge Value Added Tax on the same item;

(d) if so, the details thereof and the steps taken in this irection;

(e) whether the Customer can deduct Tax at Source from the supplier directly (for packaged software products); and

(f) if so, the details thereof and section under which they can do the same?
ANSWER

MINISTER OF THE STATE IN THE MINISTRY OF FINANCE (SHRI S.S.PALANIMANICKAM)

(a) and (b): yes, Sir. Providing the right to use information technology software,supplied electronically for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other information technology software products, figure under taxable service under section 65(105)(zzzze) of the Finance Act, 2008. The tax has been imposed in view of the fact that internationally right to use information technology software is considered as a service.

(c) No, Sir. Since Value Added Tax (VAT) falls under the powers of the State Government, no step can be taken by the Government of India to ensure the non-levy of VAT for the same.

(d) Does not arise in view of (c) above.

(e) and (f) The supply of packaged software product is a technical service within the meaning of clause (c) of section 194J(1) of the Income Tax Act, 1961 (Act) as it involves rendering of technical services as per the explanation (b) to Section 194J(1). Therefore, the customer is liable to deduct tax at source for the payments made or credited to the supplier for supply of packaged software product.

2. Question 5789 answered on 30-4-2010. Service Tax on Packaged IT Software

5789. SHRI SANJAY BRIJKISHORLAL NIRUPAM:

Will the Minister of FINANCE be pleased to state:
(a) whether the Government is charging any Service Tax on the packaged IT Software;
(b) if so, the details thereof and the details of VAT/Sales Tax levied on the same alongwith the reasons therefor;
(c) whether the Government is considering any proposal to amend the existing laws/schedules in this regard; and
(d) if so, the details thereof and if not, the reasons therefor?

ANSWER

Minister of State in the Ministry of Finance (Shri S.S.Palanimanickam)

(a) and (b): yes, Sir. Service tax is charged on certain types of Packaged IT software. However vide Notifications 2/2010-ST and 17/2010-ST both dated 27/02/2010, Packaged IT Software pre-packed in retail packages for single use has been exempted from service tax leviable under IT Software Service, subject to specified conditions. Value Added Tax (VAT)/Sales Tax on Packaged IT software are levied by the State Governement under their respective enactments.
 
(c) and (d): Clarification has been sought by an association of software companies regarding the scope of the notification 2/2010-ST and 17/2010-ST. The same is being examined.

Rajesh Kothari

Thanks for the 'detailed' response. But I can't interpret what it means in case of 'export' of packaged software.

We are exporting packaged software - users download trial version and pay $30 online via paypal etc to receive registration key. There are some (negligible) domestic (Indian) sales too but most of it is to US/Europe/East-Asia.

Do we need to do anything about sales/service tax? Our assumption so far is that all exports are exempt from such taxes. As the few domestic sales are also happening in Dollars via online channel, we think we can safely club them as part of international sales.

Are we sitting on a tax-audit time bomb?

hI IN ABOVE QUERIES WHETHER IT IS LIKE THAT WE NEED TO  CHARGE FIRST SERVICE AND THAN VAT ON TOTAL PRODUCT

First Service tax is charged and then on the total of Basic Price + Service tax VAT is charged. Octroi - if any - is charged on total of all i.e., Basic Price + Service Tax + VAT.

For example,

Say, Basic Price = Rs.100

Service Tax @10.3%= Rs.10.30

VAT @5% = 5% of 110.30 (100 + 10.30) = Rs.5.52

This form of double taxation seems particularly regressive for ISV's in the Indian market - at a critical time. Is there any other industry facing this in India?

I can tell that most customers expect any form of taxation to be included in the price you quote - meaning ISV's bear increases. Will be good if ISV's who are doing their billing this way can share their experiences.

Apparently the Finance Ministry is of the view that Nasscom and its members are keen on retaining Service tax on sale of Software. I did bring this topic up with Mr Som , Mr KK and to Mr Lakshmi Narayanan. during the recent Emerge in Chennai.. Apparently NAsscom is not spearheading it and providing the required inputs to the Govt is what we understand. Mr Som said he will discuss but guess could not find the required time..

Lets hope the views here evoke a serious attempt from Nasscom  to resolve the anamoly......  you dont pay Service tax when you buy an Audio or a movie CD or DVD so why is it different for Sale of Software ....

Let me check this internally and update you on the status.

Thank you.

Avinash

Profile Image for Gopi B. Gopi
  • Sun, Jun 20, 2010 8:49 AM

Quoting from Rajesh's Post

"(a) and (b): yes, Sir. Providing the right to use information technology software,supplied electronically for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other information technology software products, figure under taxable service under section 65(105)(zzzze) of the Finance Act, 2008. The tax has been imposed in view of the fact that internationally right to use information technology software is considered as a service."

That is an incomplete answer, as it only covers clauses 1,2 of earlier post by Hari (Sep 2008) and further gives an explanation for clause-3 which is clearly not included in the answer !

>3. Acquiring the right to use information technology software supplied electronically;

Of course, it is covered i.e., this mode of delivery of packaged software also attracts Service tax.

Madras High Court has given order on Writ Petition filed by ISODA on Double taxation on Packaged Software recently. It can be read here:

http://judis.nic.in/chennai/qrydisp.asp?tfnm=27311  

 

So, can you give us a 1 para summary. Sorry, I am trying to steal it from you if you have already read the long document. :-) !

It seems points 30 onwards have the answer, but Im still confused. Definitely requires a legal mind to tell us the answer to the basic bquestion - 'Should a customer pay service tax also for a licensed product apart from paying VAT'.

Will appreciate it if anyone has consulted a tax consultant/ lawyer to share their thoughts.

Hi Can we have any clarity on this ?? Link updated by rajesh is not working.

Thanks rajesh for your inputs.

we are facing same problem with one of our client. so any one can tell me how this double taxation (service tax by central govt. & VAT/CST by state govt.) make them understand to our clients?

It is difficult to explain to customers why double taxation is there. But tell them that wef 16-5-2008 Service tax dept has imposed service tax on packaged software (Section zzzze of 65(105)). Hence Service tax is charged and then VAT is charged on total as per state govt's VAT rules.

Text of ISODA judgement can be accessed from this link:

http://judis.nic.in/judis_chennai/qrydisp.aspx?filename=27311

If it becomes in-accessible, visit judis.nic.in, select Madras High Court, search by case no. Enter 3811 of 2009. You will see two orders. Select one with 'Infotech Software Dealers Association'.

 

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