India could miss the worldwide launch of Microsoft?s new Windows 7 operating system on Thursday, as the retail consignment of the software has not been cleared by the customs authorities, which is demanding physical proof of the software licence. Windows 7 is one of the most anticipated launches in recent times from Microsoft.

Ironically, the problem stems from an industry-friendly move in Budget 2009-10, which changed the tax structure on packaged software by partially exempting it from excise duty. As a result, packaged software is taxed in two parts. While the cost of the media (the CD containing the program) would attract excise duty, the license would attract only service tax.

Accordingly, the customs tariff was also changed to exempt imported packaged or canned software from countervailing duty. The step aimed to remove the dual taxation anomaly on a product that is of significance to the IT sector. The Microsoft case could now prompt a finance ministry clarification on the subject.

?The unavailability of Windows 7 following its official launch will amount to more embarrassment than actual loss of business for a company that is pulling out all the stops to promote its new operating system,? said Gartner principal research analyst Diptarup Chakraborti.

When contacted by FE, a Microsoft spokeswoman refrained from commenting on the issue, but did not deny that the import of software faced certain issues. ?Industry bodies are seeking a clarification in this regard. Hopefully, things will be sorted out soon,? she said.

According to a source, while the customs department is seeking physical proof of the license to use the software, which attracts a service tax of 10.3% including surcharge, that will be difficult to furnish. ?Since the license, or the right to use, is embedded in the CD of the software itself, it is not possible to reproduce it on paper,? said the source.

Software companies like Symantec and Adobe have also faced similar problems with their consignments. Adobe India chief Naresh Gupta said, ?Sometimes, it leads to opportunities being delayed and sometimes opportunities being lost forever. Unavailability of software for whatever reason also promotes piracy.? However, Gupta did not comment on the financial loss to Adobe.

To overcome the problem, importers are mandated to make a declaration to customs officials about the value of the transfer of rights and also provide proof that they are registered for payment of service tax.

Yet, there is still lack of operational clarity at the ground level because of which consignments are often held up at customs, an official said. ?Often, customs officials also hold up shipments to ensure that the importers are registered for paying service tax.?

Software firms, especially Microsoft, are therefore lobbying with the finance ministry for a clarification on the issue. Many companies have demanded that the excise duty exemption be replaced by an exemption from service tax.

North Block is scheduled to meet industry representatives to understand their demands before it comes out with a clarification. ?There?s a lot of confusion on the issue. To address the problem of dual taxation on software, we removed excise duty. The decision was based on representations from the IT industry. Now, a lot of companies have sought an exemption from service tax, instead,? said a finance ministry official.

Recently, industry body Nasscom sent a recommendation to the finance ministry asking for clarity on the subject. ?There are several operational issues with the new rules. We have asked for clarity on their applicability,? explained Nasscom vice-president Raju Bhatnagar.

Vinnie Mehta, executive director of IT hardware industry body MAIT, said, ?The decision taken during the Budget was a step in the right direction. However, the industry is expecting a clarification. In the software business, the license is the software itself, a physical license does not exist.?