Double tax leaves dealers in a fix

The Government of India's move to charge additional service tax on packaged
software has left dealers unhappy. While dealers suggested that this would
adversely affect their business, they also indicated that vendors and
distributors need to together with dealers and make a representation to the
respective government authority to look into the matter.

During Union Budget 2008, the government of India had announced that
additional service tax would be charged on IT services with effect from May 16,
2008. Following the announcement, distributors-including Ingram Micro, Redington
and software giants like Oracle and Microsoft levied additional tax on the
license and software update. Now, those licenses that earlier attracted Value
Added Tax (VAT @ four percent), will now attract an additional 12.36 percent
service tax, which was earlier applicable only on product support.

Taking a stance

But vendors and distributors are not willing to do much about the situation,
instead preferring to play safe. When The DQ Week contacted Oracle the vendor
refused to comment. On contacting Microsoft, a spokesperson mentioned that
certain aspects of the new service tax provisions were not very clear with
respect to their application to software products.

“We intend to work with industry organizations towards getting a
clarifi­cation from the government. The government has made its clear that it
intends to subject all software to either service tax or excise duty. However,
since service tax paid by both service and manufacturing sectors is generally
available as an input credit, the cascading impact of the new levy should be
limited on our business. We continue to provide our inputs and engage with the
government directly, and through industry forums, such as Nasscom, FICCI,
Assocham etc,” stated the Microsoft spokesperson.

PS Neogi, President, Redington India stated, “We have always maintained that
the local taxes and levies as applicable by the competent authorities and/or
government bodies will be charged as applicable at the time of billing. This is
true for today, as much as it was true for yesterday, and will be true for
tomorrow. Taxation is not a profit activity for us and whatever gets charged as
in a transaction gets deposited in the respective government treasuries/taxation
department.”

Dealers cry foul

While agreeing to the fact that the new taxation policy would affect their
business, dealers across the country indicated that the software license should
either be treated as a product or as a service and accordingly either service or
sales tax should be applicable on the same.

Alok Gupta of New Delhi-based Softmart Solutions stated, “I have received
circulars from distributors including Ingram Micro, Redington and Oracle that
starting June 1 dealers will have to pay additional service and sales tax on the
software licenses sold.”

Clarifying further he mentioned that this move has affected them in numerous
ways. “In the first place, billing for those orders that we had taken earlier
will change and we will need to charge both VAT and service tax on the same.
This will lead to further loses and confusion in the business. This aside many
states in the country are being charged VAT of 12 percent as opposed to four
percent in regions like Delhi and Mumbai and for them paying additional tax of
12.36 percent, as service tax will make matters worse. Besides, many of the
small dealers in upcountry locations till date do not have a service tax number
and they will have to apply for the same, which again will delay business
processes. This move has lead to a drastic change in the business and there will
be a 50 percent drop in the sales figure with immediate effect and in the long
run business will see a downfall of 10 to 20 percent,” shared Gupta.

Stating that the move by the government was unjustified Brijen Shah of Pune-based
Dikibi Technologies mentioned, “Any tax implemented by the government is
accepted over a period of time. But this is injustice on the part of the state
government and the central government. Ideally, when we offer any services then
service tax is applicable on the same and the amount is collected by the central
government. However, when a product is sold, VAT is payable on it and the amount
is collected by the state government. Therefore, either the license should be
treated as a product or a service. Applying both VAT and service tax is not
acceptable.”

Shah further added that associations at the state level would have to unite
and make a representation at the Central VAT committee as to either treat the
software license as a product or service.

“Vendors and distributors are unlikely to be affected by the additional tax
being implemented on the licenses because vendors operate on dollar prices and
collect their payments from the distributors and on the other hand distributors
play a safe role always and never really are concerned about the dealers. We
will have to collectively make a representation at the government level and draw
their attention towards the issue,” Shah added.

Santosh Agarwal of Delhi-based Electro Sales Corporation opined, “Under no
circumstances can packaged software licenses be subject to service tax. Yes it
is evident that CVD/excise is 12 percent on packaged software and licenses and
customized software development, which is not under the scope of VAT, will
attract service tax. As per my understanding, packaged software is a product and
should attract VAT. Custom software is a service and should attract service tax.
The associations, jointly with the software companies should take this matter
seriously and work towards an immediate clarification.”

Sanjay Agarwal, Director of Noida-based Momentum InfoCare clarified that both
the taxes cannot be implemented on the same transaction. Union Budget 2008 has
clearly covered customized software under service tax and the budget did not
cover imported packaged softwares such as Microsoft Office, MS Windows, backup
softwares etc. If service tax is made applicable on software product sales,
end-customers will deduct TDS at 10.3 percent (on technical and professional
services) before making payment to us. This will have severe impact on our cash
flow and we will leave huge amount with IT department for tax refunds, and this
amount of TDS will be much more than our transaction margins.

“I think Union Budget notification as communicated by distributors needs to
be explored, understood, discussed and written clarifications should be sought
from IT Department and Sales Tax Department before making it ad-hoc applicable
from June 1. The matter will have to be raised with all principals and
distributors (Microsoft, Symantec, Trend Micro, CA, and Oracle among other) for
speedy clarification on this issue. We should also get a clear notification from
Ministry of Finance and Government of India on implication of both taxes on 100
percent value of one transaction,” Agarwal added.

Jayessh Mehta, President, IT Traders Association, Bangalore opined, “This
certainly is bad news for dealers and will adversely impact our business. We
will raise the concern both at the association level and together with the
vendors and distributors.”