The Hindu Business Line : Good in principle

THE SUPREME COURT judgement declaring software sold off-the-shelf as `goods' and upholding the levy of sales tax is right in principle and brings an element of certainty to commodity taxation of software for the first time. Upholding the Andhra Pradesh High Court judgement in the Tata Consultancy Services case, the apex court has clearly stated that software will attract sales tax no matter that it is considered a tangible or intangible property. Obviously, individual State governments are bound to take the cue and start imposing sales tax on similar transactions leading to higher prices payable by consumers and SMEs (small and medium enterprises) to some extent.

The industry perception that the ruling may push up costs and thus act as a dampener to the level of absorption of information technology or increase the risk of software piracy may appear justified. But the fear may be misplaced. For, the competitive interplay of market forces may dilute the impact of this ruling. Since individual States are vying to attract global and Indian software majors to set up their software development centres in their territory, there is a fair chance of some choosing not to impose this levy at all. True, in the run-up to the introduction of a value-added tax system the States did commit themselves to abolishing sales tax incentives. But some kind of fiscal self-denial in the interest of attracting high-profile IT investments cannot be entirely ruled out. Even if some States levy a tax on the value of packaged software, competitive pressures may force both global and Indian companies to absorb a part of this increase. Again, for large companies at least, the levy may not make a material difference to their purchasing decision and as such institutional sales may not be affected. Finally, packaged software accounts for less than 15 per cent of the total domestic software and services market. Though this segment is poised for sharp growth, its impact on the overall growth of the domestic IT sector will continue to be minimal.

The latest ruling is, however, beset with operational complexities. Between the two extremes of truly mass-produced software and custom-built solutions there is a vast range of standard elements and modifications attempted for a customer or a group (say, for a specific sector). Consequently, the situation is ripe for subjective interpretation at the assessment stage as to what software is taxable and what is not. It would be better that the law made no distinction between mass-produced and custom-built software. Since both commodity and services taxation is prevalent, as a further measure of reform, the country would be better off bringing both services and commodities under a comprehensive and integrated system of value added taxation.