Microsoft?s Windows 7 may be the latest victim, but the taxation of packaged software has been a longstanding problem. What makes it even more convoluted is that there seems to be no consensus on what needs to be done.

All agree that the tax regime for packaged software is complicated and there is an anomaly of dual taxation. Till July (when the Union Budget 2009-10 was passed), software attracted a 10% service tax when it was downloaded. It also attracted an 8% countervailing duty for a licence and a Vat at 12.5%. To be fair, the finance ministry did try to sort out this mess in the Budget. Based on industry representations, packaged software was granted partial exemption from excise duty and the countervailing duty. Now, it is taxed in two parts?excise duty is levied on the cost of media and service tax on the software?s licence.

The changes haven?t helped though, with the industry continuing to badger finmin mandarins. While some have asked that the excise duty exemption be replaced with a service tax exemption, others say service tax can?t be levied on packaged software as it is a good and not a service. In fact, a writ petition is pending with the Madras High Court, questioning the constitutionality of levying service tax on packaged software.

Perplexed, finmin plans to meet all software industry bodies to understand their demands. Whatever it eventually decides, the Centre must ensure that it percolates to the ground level. Much before the current imbroglio, customs officials have been regularly holding back consignments of imported software, often over their valuation for tax purposes.

Meanwhile, piracy is booming. And 35% of Indian-domiciled desktops have illegal operating systems. Worse,domestic sales in the Rs 10,000 crore packaged software market have been dipping. Some of the demand contraction may be due to the global slowdown, but at least a part of it is because global software majors can?t get their products into Indian market on time. Savvy retail customers don?t buy software from the grey market to save costs: often, the only place where the latest version of a software is available is the grey market.

?surabhi.prasad@expressindia.com