Budget compounds confusion over tax on SW

DQW Bureau
New Update


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



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)