Budget compounds confusion over tax on SW

Software dealers in India have for long been plagued by the issue of double
or triple taxation on packaged software. Lack of clarity on the issue has
further propounded their situa­tion. During the Union Budget 2009-10, the
government announced exemption of excise duty on packaged software. This ensured
that both excise duty and countervailing duty (CVD) would be exempt on packaged
software and it would now attract service tax on the license portion. However,
there is much confusion among software dealers on whether to charge value added
tax (VAT) and service tax on the domestic transactions of the packaged software
or not.

Throwing light on the issue, Alok Gupta of Delhi-based Softmart Solutions
said, “Dealers of packaged software have been charging excise duty and CST or
VAT on the products billed and service tax on the implementation of service of
the software. The exemption of excise duty on packaged software and the
simultaneous application of service tax has put the dealers in a confused state.
Now dealers are questioning whether they should continue with the existing tax
structure, or should they stop charging excise duty on license fee or only
charge the service tax.”

With no clear communication on which tax structure to follow, dealers are
looking to bodies like Nasscom for help. “We are not clear what tax structure we
should follow. We had requested Nasscom to give us clarification on the matter
and the software body has assured us that they will hold dialogues with the
government. But till then dealers are charging tax as per their choice. It is
better if the matter is clarified at the earliest,” said Mukesh Gupta of Delhi-
Based Digitronics Infosolution.

There are various factors that are considered when fixing the tax amount of a
packaged software. Firstly, there is the software itself. Secondly, there is the
license part of it. Earlier, customized software and its license did not attract
any custom duty, which includes CVD. There was the packaged software that
attracted a CVD of eight percent and the license did not attract any CVD.

Then there are software that can be downloaded from the Internet, which
attracts service tax. This is subject to central taxation. When the software is
sold in the state it attracts VAT. There has been confusion over how to define
packaged software and also customized software. Then there have been several
means and ways of delivering the software itself. One can download it from the
Internet or one can get a master software through import and may replicate them
locally, and then give it to a third party. Once it is being replicated, it is
subject to excise duty.

Nitin Aggarwal of Delhi-based Trifin Information Technology mentioned that
there is no clear communication as to how the new inventory of software would be
taxed.

Hemant Chabria of Kolkata-based Chabria Infotech added that the taxation
structure would be clear only when the billing of new stock starts. Till then
partners are charging VAT as before.

Sudarshan Ranganathan, CEO of Chennai-based Veeras Infotek and a member of
Infotech Software Dealers Associa­tion (ISODA) said, “We are seeking
clarification from the sales tax department. Right now we are not billing any
new stock as we are not sure whether partners will have to pay any penalty for
non-payment of service tax, that would be calculated from 2008. These things
would be clear once we get some communication from the concerned department.”

To understand the situation, Manufacturers Association of Information
Technology (MAIT) held a meeting with the ministry of finance.

Sharing information on the discussion Vinnie Mehta, Executive Director, MAIT
said, “An importer has to pay royalty to the software owner. One issue is
whether royalty should be included in the cost of software or not. There are
many permutations and combinations of activities that are creating the
confusion. Government has said that the value of the software is the license
part of it as software as a vertical is largely within the service-oriented
sector. Hence, the right to use valued portion will be taxed. Government has
announced that packaged software will now attract service tax on the licensing
side. But it is still not clear whether four percent of special addition duty
will continue. "

When contacted Harinder Salwan, Secretary of Infotech Software Dealers
Association (ISODA) opined, “The status quo remains and there is no clarity on
whether to charge service tax or both VAT and service tax.”

Citing the example of Microsoft Operating License Products (MOLP), Salwan
pointed out that while for Corel and Adobe, the software dealers are still
charging both the service tax and VAT, for Microsoft MOLP CVD is being paid by
the distributors and only VAT is being charged.

(with inputs from Puja Sharma)