Budget compounds tax confusion on SW

New Delhi: Software dealers in India have for long been plagued by the issue of double or triple taxation on packaged software. Lack of clarity on the issue has further propounded their situation. During the Union Budget 2009-10, the government announced exemption of excise duty on packaged software. This ensured that both excise duty and countervailing duty (CVD) would be exempt on packaged software and it would now attract service tax on the license portion. However, there is much confusion among software dealers on whether to charge value added tax (VAT) and service tax on the domestic transactions of the packaged software or not.

Throwing light on the issue, Alok Gupta of Delhi-based Softmart Solutions said, “Dealers of packaged software have been charging excise duty and CST or VAT on the products billed and service tax on the implementation of service of the software. The exemption of excise duty on packaged software and the simultaneous application of service tax has put the dealers in a confused state. Now dealers are questioning whether they should continue with the existing tax structure, or should they stop charging excise duty on license fee or only charge the service tax.”

With no clear communication on which tax structure to follow, dealers are looking to bodies like Nasscom for help. “We are not clear what tax structure we should follow. We had requested Nasscom to give us clarification on the matter and the software body has assured us that they will hold dialogues with the government. But till then dealers are charging tax as per their choice. It is better if the matter is clarified at the earliest,” said Mukesh Gupta of Delhi- Based Digitronics Infosolution.

There are various factors that are considered when fixing the tax amount of a packaged software. Firstly, there is the software itself. Secondly, there is the license part of it. Earlier, customized software and its license did not attract any custom duty, which includes CVD. There was the packaged software that attracted a CVD of eight percent and the license did not attract any CVD.

Then there are software that can be downloaded from the Internet, which attracts service tax. This is subject to central taxation. When the software is sold in the state it attracts VAT. There has been confusion over how to define packaged software and also customized software. Then there have been several means and ways of delivering the software itself. One can download it from the Internet or one can get a master software through import and may replicate them locally, and then give it to a third party. Once it is being replicated, it is subject to excise duty.

Nitin Aggarwal of Delhi-based Trifin Information Technology mentioned that there is no clear communication as to how the new inventory of software would be taxed.

Hemant Chabria of Kolkata-based Chabria Infotech added that the taxation structure would be clear only when the billing of new stock starts. Till then partners are charging VAT as before.

Sudarshan Ranganathan, CEO of Chennai-based Veeras Infotek and a member of Infotech Software Dealers Association (ISODA) said, “We are seeking clarification from the sales tax department. Right now we are not billing any new stock as we are not sure whether partners will have to pay any penalty for non-payment of service tax, that would be calculated from 2008. These things would be clear once we get some communication from the concerned department.”

To understand the situation, Manufacturers Association of Information Technology (MAIT) held a meeting with the ministry of finance.

Sharing information on the discussion Vinnie Mehta, Executive Director, MAIT said, “An importer has to pay royalty to the software owner. One issue is whether royalty should be included in the cost of software or not. There are many permutations and combinations of activities that are creating the confusion. Government has said that the value of the software is the license part of it as software as a vertical is largely within the service-oriented sector. Hence, the right to use valued portion will be taxed. Government has announced that packaged software will now attract service tax on the licensing side. But it is still not clear whether four percent of special addition duty will continue. MAIT is seeking clarification that will help us in resolving the litigation and moving forward.”

Service tax was introduced on software transactions during the Union Budget 2008-09. The new tax structure covered the transactions related to packaged software as well, which was counted as material subject to excise duty and VAT.

When contacted Harinder Salwan, Secretary of Infotech Software Dealers Association (ISODA) opined, “The status quo remains and there is no clarity on whether to charge service tax or both VAT and service tax.”

Salwan further elaborated that according to the governments interpretation, if it's a box then only excise duty or CVD is applicable on it followed by VAT. Whereas, if it is a paper license then only service tax (no excise duty or CVD) will be applicable on the same.

Citing the example of Microsoft Operating License Products (MOLP), Salwan pointed out that while for Corel and Adobe, the software dealers are still charging both the service tax and VAT, for Microsoft MOLP CVD is being paid by the distributors and only VAT is being charged.

ISODA has made several representations at CII and FICCI since the issue first came to light on May 16, 2008. The association had sought clarity on the definition of packaged software and the tax that is applicable on it. In addition the body also demanded abolition of CVD, a demand that was met during the budget announcement, but has now added to more confusion.

According to Excise/Customs classifications, there are more than one classifications of software product. For example, “Packaged or Canned Software” comes under custom's heading:

8524 40 11 and it is liable to attract CVD; while “Paper license of Software” comes under custom's heading: 4907 00 30 and is liable to attract NIL customs duty. So the same item viz, Computer Software falls under two classifications, depending on whether it comes as a Packaged Product or Paper License.

(with inputs from Puja Sharma)