TDS haunts software dealers

The advent of double taxation had opened a Pandora's box of trouble for software dealers across the country. Dealers were expressing concern over whether software licenses would be treated as a product or service, and there was much confusion revolving around the same. However, dealers across the country are now suggesting that more than the double tax it is the tax deducted at source (TDS) that is pinching them and having a direct impact on their cash flow (working capital).

Talking about the same, Alok Gupta, CEO of Delhi-based Softmart Solutions stated that TDS is calculated on the basis of the margins any industry is earning. According to the assumptions of the tax departments, TDS for software development companies should be very high (assuming that the industry is earning margins close to 30-40 percent). However, this margin is being earned by software development companies and not the software trading companies.
He further added that though TDS can be claimed at the end of the year, it has an immediate impact on their business. “We can claim TDS at the end of the year but it has an immediate impact is on our working capital. People who sell to the end-consumers or have more than 20-30 percent exposure to this business will face much problem on this front as they will have to part with a certain amount of their working capital.”

Sudarshan Ranganathan, CEO, Veeras Infotek, Chennai mentioned that once Indian Software Dealers Association (ISODA), India's first channel association for software channel partners, is registered they will file a writ petition. He further mentioned, “With service tax and sales tax being implemented on the software licenses there is an undue rise in the prices of software by 30 percent. On the other hand we earn a margin of two to three percent on the software licenses sold and the tax (11.33 percent) applicable on the same. 10 percent of every transaction that we make is being supported by us through our working capital. At this rate within three months we will have no cash to support the transactions and our business. This will sooner or later hit the distributors as well. Another problem with TDS is that it takes at least three years to get a refund, which will have a crippling effect on our business. Our TDS for 2004 is yet to come and this in itself suggests the seriousness of the issue.”

He further shared that the only way to escape TDS is to share the projected profitability and a list of companies they deal with, with the tax department who will exempt them for those companies. “This is an unlikely option given the large number of customers we deal with,” he opined.

Harinder Salwan, CEO, Tricom International, Mumbai echoed the same concern. “As members of ISODA we are looking to hire lawyers to better understand the issue and raise our concern successfully. By the first week of August we will be filing a writ petition in the high court.”

He also indicated, “The buying and selling of software involves certain amount of service tax and hence we have to deduct TDS of 11.33 percent and same goes for our customers. In our industry the margins as it is are not more than three to five percent and if we keep on deducting TDS at 11.33 percent we will end up shutting down our businesses. Again any exemption that we can look forward to from the tax department can happen only when we share a list of our customers and present our balance sheet to them on the basis of which they will give us some exemption. In such a case if we add a new customer how will we be able to get exemptions for the sales made to him? Hence this is not a workable solution.”

Salwan also added that distributors have wrongly interpreted finance minister's speech and are treating software paper license as a service instead of considering it a product. It is only the customized software that should come under the service tax bracket.
Kolkata-based Hemant Chabria of Chabria Infotech opined, “We don't mind the software prices going up but with this double taxation in place the customers will deduct a TDS of 11.33 percent. Given that we are earning margins close to two percent if we keep on deducting TDS we will go bankrupt as the refund process takes not less than three years time. This certainly is not good news for our business.”