Why pay Service Tax on Packaged Software - to be on the safer side?

In India, the taxation and legal system is very complicated, extremely slow and quite expensive in terms of money and time.

So, whenever there is an ambiguity on the applicability of a particular tax or law - usual advise given by Tax Consultants is - "we feel this - this and this ... - but to be on safer side pay tax" i.e., collect from the customer and pay to the government. After all - it's the poor customer who pays!!!

And bigger the company seeking the advice - bigger is the consultant i.e., all MNC's seek advice from one of the big four management consultants. Never mind what their track record is. We have seen fate of number of global consulting organizations and their customers in the last 7-8 years. Not only consultancy organizations but even their top notch MNC customers have gone out of businesses. So, much about the big consultants and their advice!!

So, it's time that we start using our brain and innate wisdom to understand the tax/legal issues on hand and devise ways to tackle the issues. Times are tough and going forward - it's going to be tougher. So, it's time that we get out of our cosy comforts and forget about being safe and start learning to take stand, devise a strategy to fight the outcome of the stand and fight out - when required.

Take the issue of double taxation that has shaken the entire Software Industry in India. It has applied a 'brake' and changed the 'gear' from 5th to the 1st gear - without pressing the clutch. Any one who knows how to drive a four wheeler would understand what's fate of such an action.

Some people think that Indian Government has done this intentionally. It's done with a intention of milking docile IT customers and IT Software Houses of their hard earned money. And Government is not in a mood to offer quick corrective action. They want as much money as possible in the government coffers - so that they can pay the farmers and arrears to government employees as per 6th Pay Commission recommendation. And you know very well why all this is done - of course, to get votes in the next election and stay in power for another five years. All this in the name of democracy. It's a shame on us that we take all this lying down.

Consider this case a little deeper to examine - what's implication of both taxes applied simultaneously on the sale of a packaged software product?

It leads a question - whether 'Service tax' and 'VAT' is to be paid on 'basic price' simultaneously or one after another. If applied simultaneously - we are thrown back by 25 years to age old system of manual book keeping because modern Accounting Packages can not handle it. If you are using modern ERP packages then you will need to hire services of costly and time-consuming ERP consultants to modify your billing system. And they will take couple of months to carry out the necessary changes to your billing and accounting system.

If you apply it one after after then question arises - which comes first? VAT or Service tax. Fortunately, there is a consensus among tax authorities that Service tax comes first because it's a Central Government tax (like Excise) and VAT comes next. So, you pay Service tax @ 12.36% on basic price and then charge VAT on the total of basic price and service tax.

So far so good. But, bigger issue to be discussed and settled is whether Service Tax is applicable on the sale of packaged software or not. This is because as per Finance Minister's budget speech and a letter written by the Service Tax Commissioner - Service Tax is applicable on tailor made software and Excise/CVD is payable on the packaged software.

So, it is time to decide whether software resellers are selling tailor-made software or packaged software. Once they are clear about this point they will be able to convince all parties viz., government, distributors and vendors - that Service tax is NOT payable on the packaged software.

In this context, if any one is having any doubt, please read clarification given by Tax Research Unit (TRU) vide D.O. F. No.334/1/2008-TRU dt.29-2-2008:
..
4.1.5 Software and upgrades of software are also supplied electronically, known as digital delivery. Taxation is to be neutral and should not depend on forms of delivery. Such supply of IT software electronically shall be covered within the scope of the proposed service.….
..
4.1.7 Following consequential amendments in other taxable services are also being made: To clarify as removal of doubts that ‘Management, maintenance or repair of properties’ includes Management, maintenance or repair of IT software [section 65(105)(zzg)]. Maintenance of packaged software (being goods) is also leviable to service tax under the said service.

Notice "taxation is to be neutral and should not depend on forms of delivery" and "packaged software (being goods)". So, when we sell packaged software supplied vide different forms of delivery viz. Shrink-wrap, OEM, Paper license or Internet download, it's all same viz. packaged software. Packaged software (being goods) - attract VAT. So, there is no Service tax.

Once we all (dealers, distributors and vendors) are clear and are all united on this issue we could take a stand as an industry and we all should collectively refuse to pay Service tax to government. If government wants Service tax then let them demand it.

Currently we all are assuming that government wants Service tax on packaged software and we are paying it. But indication is otherwise i.e., government's original intention was to levy Service tax on the Tailor-made or Customised software only. Same thing was said in the Finance Minister's speech also.

While presenting the Finance Bill 2008 he said: “I propose to increase the excise duty on packaged software from 8 per cent to 12 per cent to bring it on par with customized software which will attract a Service tax of 12 per cent.

I've learnt from a customer that he had some verbal discussion with the Commissioner of Service tax. In that Service Tax Commissioner confirmed that Service tax is payable only on the tailor made software. He even said that his field staff does not have mandate for the collection of service tax on packaged software products.

BUT WE ALL ARE PAYING SERVICE TAX ON PACKAGED SOFTWARE - RATHER FOOLISHLY - TO BE ON SAFER SIDE.

WHOSE FAULT IS IT? It is time we start thinking like Legal Experts and Court Judges viz., what is the intention of government in bringing IT Software Services in Service tax net? And whether it is correct to charge two taxes on same item viz., Packaged IT Software .

Believe me, in case of doubts, even our constitution rules in favour of the tax payer and not government.

Service tax is imposed under entry 97 of List I (in Constitution of India) which is a residual entry. Thus, if a transaction is covered in list II, it cannot get covered in entry 97 of List I. Since sales tax is covered in list II, it is doubtful if service tax can be imposed on a transaction which is entirely getting covered under List II.” - V S Datey - Tax consultant.

Then - it's time that we take a stand as a IT Software Industry and decide not to pay Service tax on packaged software.

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