...As TDS haunts software dealers

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

Shedding light on 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 the 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.

While TDS can be claimed at the end of the year, Gupta said that the tax has
an immediate negative impact on their business. “We can claim TDS at the end of
the year but its 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 a problem on this front as they will have to part with a certain amount of
their working capital,” added Gupta.

Sudarshan Ranganathan, CEO, Veeras Infotek, Chennai mentioned that once
Indian Software Dealers Association (ISODA), is registered they will file a writ
petition.

He further mentioned, “With service tax and sales tax being implemented on
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.”

Rangnathan further shared that the only way to escape TDS is by sharing with
tax department the projected profitability and list of companies they deal with.
Only then will the partners get an exemption. “However, 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 understand the issue
better and raise our concern successfully. By the first week of August we will
be filing a writ petition in High Court.”

He also indicated, “The buying and selling of software involves certain
amount of service tax and hence we have to deduct a 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 if we share a list of our
customers and present our balance sheet to them. On that basis 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
at any cost.”

He also added that distributors have wrongly interpreted the Finance
Minister's speech and are treating software paper license as a service instead
of considering it a product. It is only 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 double taxation in place 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. This certainly is not good news for our business.”