Ever since the 2004 decision of the Andhra Pradesh High Court in Tata Consultancy Services that packaged software was goods liable to VAT was blessed by the Supreme Court in 2005, there seemed to be inevitability about the levy of indirect taxes on software. After the apex court in a separate ruling answered the much-disputed conundrum whether the provision of a sim card is a sale or a service by deciding it could be both, the service tax department was quick to identify information technology as a service.

Software services have always had an uneasy time in Service tax. Prior to a new service head “information technology software” being created in 2008, software services were specifically excluded in service heads such as business auxiliary service (which looks like a residual head to tax anything not specifically provided elsewhere) and consulting engineer service. The 2008 levy appeared all-encompassing including canned software though the exemption for goods detailed in Notification No 12/2003 could be claimed, effectively neutralising the impact of the tax.

In late December 2010, Notification No 53/2010- Service Tax shifted the tax on packaged or canned software to Central Excise law. Information technology software made an entry in Chapter 85 of the Central Excise Tariff as item 8523 80 20 with a rate of 12 per cent. A simultaneous Notification No 30/2010 from the Central Excise Department allowed a rebate of 15 per cent on the central excise levy. Packaged or canned software was defined to mean software developed to meet the needs of a variety of users and which is intended for sale or capable of being sold off the shelf.

Notification No 14/2011

A Notification that accompanied Budget 2011 makes the levy of indirect taxes on information technology software even more complex. Notification No 14/2011 exempts packaged software or canned software, falling under Chapter 85 of the first Schedule to the Central Excise Tariff Act,1985, on which it is not required, under the provisions of Standards of Weights and Measures Act,1976 or the rules made thereunder or under any other law for the time being in force, to declare on the package thereof the retail sale price, from so much of the duty of excise leviable thereon as is equivalent to the excise duty payable on the portion of the value of such goods determined under Section 4 of the said Central Excise Act, which represents the consideration paid or payable for transfer of the right to use such goods ( more popularly known as licence fee in software lingo).

Every tax break given by the Government these days comes with a rider and for software entities that charge a licence fee, it is that they are registered under service tax provisions — obviously with the intent that the Revenue gets its pound of flesh anyway. The definition of packaged or canned software has been lifted from Notification No 30/2010. It is apparent that this exemption will be denied if there is no requirement under the provisions of the Standards of Weights and Measures Act, 1976 or any other law which contradicts the basic premise of the Notification that licence fee cannot be deemed to be manufacture warranting a levy of Excise. Such entities would have to charge Central Excise on the entire value of information technology service and avail the 15 per cent abatement.

GST

There is a common perception that GST would iron out all the creases in indirect taxes. Having opted for a dual-GST, in the case of information technology software service, it appears that both VAT and service tax would be levied under new names of SGST and CGST. At best, the see-saw between Central Excise and Service Tax would be eliminated since both the taxes would have a common name. While it may be not be the perfect antidote, GST would provide less leverage to the Government to juggle between multiple indirect taxes.

(The author is a Bangalore-based chartered accountant.)

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