The levy of indirect taxes on software in India is riddled with complexity and uncertainty. The taxation of software primarily depends on the treatment of software as ?goods? or ?services?, as the indirect tax treatment is different for the two. As a starting point, the industry relies on the Supreme Court ruling on a TCS sales tax dispute in 2005, which brought out principles on when software shall be treated as ?goods?.
In this backdrop, in May 2008, the Centre treated licensing of ?electronic software? as ?services? by levying service tax on the same. Therefore, the industry was faced with the imposition of dual levies on ?electronic download of software?, the same being treated as goods as per the TCS judgment (and hence liable to VAT/CST) and the service tax law treating it as a service.
In addition, it also treated licenses for ?packaged software? as a service, thereby introducing a service tax levy on packaged software, which was till such time only subjected to customs/ excise duty. In order to resolve this ?dual levy? of Central taxes suffered by the industry, the Centre flipped-flopped on the levy of customs/excise and service tax on packaged software over the years, trying to achieve an ?ideal? system to tax all possible transactions relating to software only once. However, every attempt to resolve this created newer issues for the industry.
The current position for import of packaged software, in media form, is that when it is intended for retail sale, service tax is exempted if customs duty is remitted on 85% of the retail price of the software and when not intended for retail sale, customs duty is exempted if service tax is discharged by the distribution chain. While this may seem like a workable option, practically, companies at the time of import are mostly unable to ascertain the end use of the software leading to uncertainties.
Importantly, in any of the models for packaged software (ie, with media or without media), the tax cost on account of the Central levies is almost 12% of the retail sale price, apart from the state levy of VAT at around 5%. Therefore, in case the companies get their tax positions incorrect, the additional duty/ tax demand of 12% along with interest and penalty will more or less wipe out the entire profits earned by software companies in the past years.
Under the negative list regime, which comes into force from July 1, the definition of ?service? specifically excludes an activity that constitutes ?transfer of title in goods? or ?transfer of right to use goods?. Therefore, upon such specific exclusion of transactions involving ?sale? or ?right to use? goods, the sale/ right to use software (whether packaged or electronic) should get excluded from the definition of ?service? itself.
The department?s ‘Draft Guidance Paper’, issued to provide an understanding of the new taxation regime and clarify certain doubts, suggests that sale of prepackaged or canned software (in whatever form) shall be in the nature of sale of goods. This shall be liable to service tax only when the licensing of prepackaged software does not tantamount to ?transfer of right to use? the software. It has been explained that ?transfer of right of goods? involves transfer of possession and effective control over such goods. Therefore, when the license to use software does not provide the effective control and possession of software to the customer, there shall be a levy of service tax on the same. Like in the case of software provided through cloud computing. Therefore, it appears that the levy of service tax shall be withdrawn on sale/right to use software, which includes licensing of software providing the ?right to use? and this shall be the case, regardless of the nature of the delivery of the software.
During these years, the Centre had attempted to cover every possible software transaction, at least once if not more, with the principle that taxation should be neutral, not depending on the forms of delivery. Unfortunately, the result seen today is a complex set of notifications and circulars to comprehend before determining the correct tax position on any transaction. With the apparent change in stance of the Centre under the negative list regime, can we conclude that the issue is finally put to rest?
The writer is leader, indirect tax, BMR Advisors. With inputs from director Kunal Wadhwa. Views expressed are personal
