Introduction of service tax on packaged software (May 2008) has made the industry feel the affects of double taxation. Various representations were made to the finance ministry, which led to introduction (July 2009) of exemptions from customs (CVD) & excise duty (ED) on royalties paid on the right to use packaged software supplied for commercial exploitation (reproduction, distribution, sale or further development). However, the problems persisted. To address such concerns, Budget 2010 introduced conditional exemptions from CVD/ ED on the import/manufacture of packaged software if the importer/manufacturer is registered for service tax. The exemption from CVD/ED on payments for the rights to use packaged software, in comparison with the July 2009 exemption, is silent on whether it applies to software imported/ manufactured for distribution or resale. However, the intent of this exemption and absence of any bar suggests that it should apply to software packages imported by/purchased from the importer/manufacturer by end users and distributors.
It is interesting to note that packaged software is exempted from CVD/ED, while service tax exemption is available only on packaged software intended for single use. Hence, while software packages imported on a single user basis should reasonably qualify for the CVD exemption, there may be questions with regard to packaged software imported and sold for a license fee dependent on the number of users. The definition of single use also remains a question.
Also, these exemptions create a new level of classification for software products as hitherto tax treatment was dependent on whether software was customised or packaged. Also, packaged software would be further sub-classified into single and multi-user software.
However, whether these amendments achieve the objective is not clear. Let?s take the example of an India level distributor who imports and sells software packages through a tiered distribution chain. A question arises on whether the service tax exemption is clearly available on all subsequent tiers (which may have been the intent of the exemption). If so, such channel would face the challenge of providing the necessary documentation to prove that its inventory has already suffered CVD/ED to claim the service tax exemption.
Another example could be mixed-supply transactions where software products are supplied through a mixed delivery model. Example, software may be electronically supplied via direct downloads, while a back-up copy is subsequently sent (and vice versa). Such mixed delivery models may pose certain challenges:
* Exemptions from CVD/ED & service tax are only available to packaged software supplied on a tangible medium
* Service tax exemption refers to that part of the ITSS definition which covers grant of software rights (item (v)) while electronic supply of software is separately covered (item (vi))
Another aspect would be the royalty paid by importers/ manufacturers for obtaining the relevant rights to such software. For this, question arises whether such royalty paid would qualify for the service tax exemption (which is, however, available on supply of packaged software) if the importer/manufacturer elects to pay CVD/ ED?
Another question is that whether the customs and excise exemptions are optional, given that both the regulations have provisions that taxpayers cannot elect not to avail unconditional exemptions. If the recent customs and excise notifications are interpreted in this manner, the flexibility to choose between paying customs duty/excise duty or paying service tax would not be available. These discussions suggest that the finance ministry has intended to remove the double-tax regime on packaged software; however, there are certain aspects of the said exemptions would need to iron out in light of its key business drivers.
With inputs from Kaustuv Sen, director