Applicability of Service Tax on Software Licenses

In addition to the query already posted, i have got expert opinion at service tax delhi website whihc says that there can be either service tax or sales tax on the software. However after the budgetory ammendment of May 2008, because of lack of clarity from Govt, both service tax and sales are being levied. This over and above the CVD/ Excise Duty leveid.

Sir,

There is a confusion on sale of software whether there should be sale tax or service tax or both.  We have inhouse developed  software for which we want to raise invoice to one of our client in India.

Kindly clarify what type of tax is applicable whether Sales tax or service tax or both.

Thanks in advance

Mohan Lal,

FAO, CDAC,

Mohali

We have inb

The Finance Act, 2008 brought some new services under the Service Tax net. One of them is Information Technology Software Service. Inclusion of a new services category — Information Technology Software Services — within the ambit of Service Tax legislation has created confusion among software firms. The levy of this new service along with other services has become effective from 16 May, 2008.Post the Notification, many feel that from 16 May, 2008, packaged software will also attract 12.36% of Service Tax. So far, packaged software attracts Value Added Tax (VAT) of 4% and 12% of excise duty.

The confusion arises as the Notification does not make a clear demarcation of whether ‘software’ is to be sold as goods and hence liable for sales tax (VAT) or considered as ‘services’ and liable for a Service Tax or both.

Packaged softwares are products that are sold off the shelf. Examples of the products that would fall under this are Microsoft, Autodesk, Adobe and several security software packages for computers. This will also include accounting software from Tally.

Normally Service Tax is payable to the Central Government when a service is offered, while VAT is applicable when a product is sold.

In case of softwares which are not sold off the shelf, the sale price includes free initial installation and implementation of the software. This includes some modifications or customisations to suit the customers, but without disturbing the basic structure of the software or its performance.

The copyright in the software is protected and always remains the property of the creator. What is sold is the right to use the software.

The sale is with a condition for exclusive use of the software by the customer at the exclusion of others. The sale gives absolute possession and control to the purchaser/user of the right to use the software.

The sale normally gives a warranty period and after the said period some annual maintenance charges are recovered for the services rendered, popularly called Annual Maintenance Contract (AMC).

At present the sale is subjected to tax under the Maharashtra Value Added Tax Act, 2002, (MVAT) and AMC is subjected to Service Tax.

The confusion is created due to the amendment in the Service Tax by the Finance Act, 2008 which has added “Information Technology Software Service” by way of sub-clause (zzzze) in Cl. 65(105) of the Finance Act, 1994, and further sub-clause (53a) in Cl. 65, defining the term “information technology software.”

The query :

Whether Service Tax is applicable to the sale of computer software ? Whether MVAT is also applicable to the same ?

Questions to be answered/verified :

To answer the query, the following crucial questions will have to be addressed :

1. Is the software ‘Goods’ and covered as a ‘Sale’ under the MVAT Act, 2002 ?

2. Is it a service chargeable to Service Tax under Cl. 65(105)(zzzze) of the Finance Act, 1994 ?

3. Whether both the MVAT and Service Tax are applicable ?

4. What is the value chargeable to Service Tax, if applicable ?

5. Facts from the sale/licence agreements.

6. Conclusion.

Read more: https://www.taxguru.in/service-tax/whether-service-tax-is-applicable-to-the-sale-of-computer-software.html#ixzz0eNdohpHf
 

6.0 Conclusion :

Considering all the relevant facts, and the law as discussed hereinabove, and relying and based on the same as mentioned above, we reach the conclusion that :

6.01 In case of the manufacturer/developer, he sells the right to use of the software.

However in case of the software dealer the position is slightly different. The software is not developed by him, but he has got the rights to sale/market/deployment of the licence/right to use.

Except this, there is no difference between the two. It is permitted to make only minor modifications to the extent of incorporating the name, etc. as per the specific requirements/parameters of the purchaser, without changing any basic structure of the software.

The vendor is also in some cases, making requirement/GAP analysis study, data migration from all earlier software, and arranging pre- and post-installation system audit, which are either free of cost or included in the software price itself, except in case of system audit. This is normally required to be carried out by an independent third party and is paid separately by the buyer to the third party.

6.02 It is evident that the sale involves both a Sale and a Service.

The grant of licence is a right to use the software, with a legal right of possession and effective control, allowing another person (purchaser) to use the goods (software).

This is done by copying the original software and then given possession and control to the buyer. The moment this is copied for Sale, it becomes goods, as defined by the Supreme Court of India.

Hence, this is a Sale of Goods under Article 366(12) of the Constitution of India, Entry C-39 of Schedules to the MVAT Act, 2002 and consequently MVAT is chargeable on sale price of the same. The position for the developer of the software and the dealer is the same.

This portion being in List-II, i.e., State List of Schedule VII to the Constitution of India, cannot be subjected to Service Tax.

6.03 The items mentioned in Point No. 5.03 may be covered and subjected to Service Tax, if any consideration for the service is received separately in any manner.

Normally the pre-installation, installation, modifications and successful commencement of use of software, etc. are provided free of cost.

As held by the Supreme Court (para 4.06) the dominant intention of parties is to buy and sell. Hence, the sale price cannot be disintegrated for the purpose of Service Tax.

Hence, in my opinion these are not chargeable to Service Tax.

Hence, under the State Vat, the position is now amply clear.

But, there has to be suitable amendment in the Valuation Rules and a basic clarification in the definition and the scope of the service, to tax services part only under the Service Tax and not the goods part, as this is not permitted under the Constitution of India.

Read more: https://www.taxguru.in/service-tax/whether-service-tax-is-applicable-to-the-sale-of-computer-software.html#ixzz0eNefs1BJ
 

I have a peculiar problem...

Since the ambiguity on Sales/Service tax, my client is charging both to their client. However, the client has now deducted TDS since service tax was levied. The invoice was raised in Feb 09 and payment has been released in June 2010, so the TDS deducted will be for 2010-11. MVAT was paid in time.

What coud be done in this case? How can the TDS credit be shown in FY 2009-10 when it will come in FY 2010-11?