Software Industry Hit Hard By Service Tax Issue : by - Harinder Salwan Secretary, Indian Software Dealers’ Association (ISODA)

Due to the recent notification of bringing the Information Technology Services under service tax with effect from May 16, the entire packaged software industry has virtually come to a standstill.

Harinder Salwan, Secretary, Indian Software Dealers’ Association (ISODA), said, “Due to the recent problems being faced by Software resellers, we have formed a new association called Indian Software Dealers’ Association (ISODA). The Association’s primary purpose is to voice and settle issues faced by the software resellers by becoming a single point of contact for discussion with the Government, distributors and principal companies.”

Explaining the issue, he said, “The issue is that, so far, we have been paying 4-per cent VAT on“‘Software Licences’ and 12.36-per cent Service Tax (including Education Cess) on ‘Software Maintenance/Subscription’. On 16-5-2008, Section 65(105) was added to the Service Tax laws. Upon inquiry, we learnt from the Service Tax Department that Service Tax has to be charged on the sale of Software Licences. It has to be paid first and after that all other taxes would become applicable. So, we have been advised to charge Service Tax on the Basic Price (i.e., Licence Fee) and then charge 4-per cent VAT on the total of Basic Price plus Service Tax. Levy of Service Tax on Software licence is against well-established legal position that ‘branded software is ‘goods’ and liable to sales tax’. Levying of Service Tax and VAT on Software Product Licence is clearly a case of ‘double taxation’. Suitable amendment is immediately required in the Service Tax laws to correct the situation. Government charges different rates of Excise/ Customs on Software licences depending upon whether it is a’‘box product’ or a ‘paper licence’. Due to this bifurcation of software licence under two categories in Excise/Customs, there is a lot of confusion among the importers as to what rate of Customs Duty is payable.”

Difficulties being faced by the resellers 
TDS is deducted from the Software Reseller when he sells Software Licence / Software Maintenance / Subscription. This is wrong because Software Reseller is not providing the actual service to the End-User. Due to the above problems, lots of practical difficulties are faced by the Software Resellers as mentioned below:
* If Software Reseller charges Service Tax and VAT at every stage of sales, then End-User deducts 11.33% TDS on the entire amount of payment from the reseller. Typical gross trading margin of a Software Reseller is 1 to 3%. If TDS is deducted at 11.33%, then the Reseller loses about 8 to10% of money from his cash flow. Thus, with every transaction Software Reseller loses money to Income Tax Department from his cash flow. This leads to a situation where after say about 100 transactions Software Reseller is left with no working capital. 
* Some consultants are of the opinion that Software Reseller should pay Service Tax only first time it is sold in India because Software Reseller is not providing any Service to the customer. In this case, price of the software increases by 12.36 per cent (similar to Customs/ Excise Duty). Subsequently, when Software Reseller sells it to End-User, he should collect VAT only. But if this is done, then the End-User is denied the possibility of claiming Cenvat Credit of the Service Tax paid because Service Tax is not on the invoice. So, it is likely that customers may refuse to accept “VAT” only invoices. 
* Under Excise/Customs classifications, there are more than one classification of Software Product. For example, “Packaged or Canned Software” comes under customs heading: 8524 40 11 and it is liable to attract 12 per cent CVD, while “Paper licence of Software” comes under custom’s heading: 4907 00 30 and is liable to attract 12.5 per cent Customs Duty, but it is exempt vide Sr. No. 157 of Notification No. 21/2002-Cus dated 1-3-2002. So, the same item, viz., Computer Software, is falling under two classifications depending upon whether it comes as a Packaged Product or Paper Licence. Due to this anomaly, there is a lot of confusion among distributors (importers) as well as Customs authorities in determining classification under which Customs Duty is payable on a particular import consignment. To further complicate the situation, distributors charge VAT only on Box Products, Media Packs, OEM Packs and Paper licences accompanied with Media; and charge Service Tax + VAT on Paper licences! 
* Whenever a Software reseller sells Software Maintenance or Subscription, TDS is deducted @11.33% by the End-User from the Software Reseller’s payment. This is wrong because Software Reseller is NOT the actual’“Service Provider” to the End-User. In fact, the Software Developer or Software Vendor, who is giving service, is usually located outside India, and he provides actual service to the End-User. But the End-User deducts TDS from the Software Reseller because there is no way by which the End-User can deduct TDS from the actual service provider! Also, there is an added issue of problems related to getting refund of excess TDS from the Income Tax Department. Then, a question arises: Under which classification of Excise/Customs, Service Tax, VAT and Income Tax laws, sale and purchase transaction of Software licence and maintenance is governed? How can we get an unambiguous answer to various questions that arise due to the confusion created by the Central, State and Local Government at all levels?

Demands of Resellers 
* Government should appreciate that “Software Licence” is a “goods” and should not charge “Service Tax” on the Software licences sold in any “form” or by any “modes of delivery”. 
* Government should appreciate that “Software Licence” is a “grant of right to use the software product as laid down in the licence agreement”. And there are various “Forms” and”“modes of delivery” of the software licence sale. Hence, for Excise and Customs classification for all software licences should come under one heading and classification, and should be treated equally. 
* Whenever a Service is “resold” by a Software Reseller (e.g., Software Maintenance/Subscription) to an End-User; TDS should NOT be deducted from the payments made by the End-User to the Software Reseller.

Finally…
The only resolution demanded by channel partners is abolition of Service Tax and/or reduction in TDS to tide over the crisis. Else, the day is not far when all software running on the computers will be pirated since there will be very few or no resellers.