TDS Troubles (Woes) reselling Software Subscriptions

My company sells Computer Software from reputed vendors like Microsoft, Oracle, Symantec, Red Hat, IBM, Novell, Adobe, Computer Associates etc.

We are an authorised channel partner of Red Hat in India to resell their software products. Recently we sold a good number of Red Hat Enterprise Linux 1 year Subscriptions to a software company. Upon receipt of the payment, we noticed that it was short by about Rs.1,25,000/-. Inquiry revealed that TDS (Tax Deducted at Source)was deducted from the payment at the rate of 11.33%.

Upon inquiry with the cusotmer - we learnt that since it was a sale of 'Technical Service' hence as per prevailing Income tax laws TDS was deducted. But, we pointed out the customer that we were 'an authorised reseller' and not the Actual Service Provider i.e., Red Hat. Customer's argument was that while it's true (but) as per prevailing law they are obliged to deduct TDS from the supplier because there is no mechanism by which they can deduct TDS from the Actual Service Provider i.e,, Red Hat!

So, we thought for a while and came up with this idea that we should deduct TDS from our Supplier who is an authorised distributor for Red Hat in India. Upon disccussion - distributor (Supplier) agreed for the same. Here the 'logic' we had in mind was that like VAT - we would get credit for the TDS deducted by the customer.

But we soon learnt from our Chartered Accountant that we WILL NOT GET any credit for the TDS already deducted by the customer! What ever TDS that we deduct from our Supplier will have to entirely paid to Government promptly! So, our assumption of making TDS payment on our 'Gross Profit' by taking in to consideration TDS deducted by Customer - was wrong. In summary, it did not make sense to deduct TDS from our supplier and make the entire payment to the Government. So, we made full payment to our supplier without deducting any TDS.

What's lesson we learnt from this? Do not resell 'Software Subscription' or 'Software Maintenance' or 'Software Maintenance Renewal' because Indian Income tax laws do not have any provision for 'resell' of 'Technical Service'!

We talked with Red Hat people about this. They could understand our difficulty and promised to look in to the matter and get back to us with a solution. And we are waiting.

We talked to our Chartered Accountant to take up this issue through their 'Association'. They said nothing can be done by their association; as Finance Minister or Income Tax Department does not ask their opinion or listen to them. Only way this can be done is by making representation to Income Tax department by the 'Association of Software Resellers'. What is it called - lobbying - I suppose. And we do not have any association of 'Computer Software Resellers' in India. Bad luck!

So, who will do the representation to the Income Tax department and ensure that suitable amendments are done to the Income Tax laws which makes provision for 'Input Credit' similar to VAT and Central Excise laws? I do not know.

OK that's that. But the funny part comes now. Keep reading...

1. Red Hat's competitor Novell is selling it's Suse Linux Enterprise Server not as a 'Subscription' but as a 'Software Product'. They are charging 4% VAT; and Red Hat charges 12.36% Service tax. So, what's moral of the story? It's obvious.

Note added on 30-10-2007: Not really. Recently when we sold Suse Linux Enterprise Server with 1 year subscription to one customer they deducted TDS while making payment to us! So, what have we learnt? Pray to God! God please save India from it's complex tax laws.

2. One of our old-time and good customer - who are a big time Software House - started deducting TDS on the sale of Software license. Just in case, if you do not know - Software license is treated as a "Product" and it attracts 4% VAT. It is NEVER considered as a 'Technical Service', hence it does not attract Service Tax. So, there should not be any TDS deduction on the sale/resell of Software license.

Upon inquiry we learnt that their 'Consultant' had opined that 'License Fees' charged towards sell of Computer Software is liable to attract TDS due to a new provision in the Income tax laws. So I decided to read this provision. Upon reading I learnt that it was all about applicability of TDS on the payment of 'Royalty' paid on usage of Scientific invention etc.! It said that TDS is to be deducted whenever "Royalty" is paid because of an "License granted" by the Inventor. Reading of full text makes it amply clear that it's all about 'Royalty' payments only.

So, how did the 'Consultant' came to this conclusion that sell of Software license attracts TDS? Oh, it was the presence of the single word 'License' that was the culprit. I reasoned to the customer that usage of word 'license' was in relation of 'royalty' payment and not in relation to 'usage of computer software' or 'grant of software license'. But Consultant's opinion was that - due to 'Stringent Penalty' for non-compliance of Income tax laws - customer was advised to be on safer side and deduct TDS!

So, what's the end result?

1. In first 5 months of the current year -we have paid more TDS than our entire year's Income tax liability. So, at the year end we will be asking for Income tax refund. Do I have to mention - how easy or difficult it is to get the refund the from Income tax department?

2. We have decided not to allow any more TDS to be deducted from the receivables. How do we do it?

We will have to apply to the Service tax department of the Income tax for a certificate which will allow either "no TDS" or "TDS at a lower rate (which is decided by the Income tax officer)" - up to the financial year end or for ever (left again to the discretion of the Income tax officer).

I learnt from my Chartered Accountant that getting this certificate is neither easy not cheap. It would cost us Rs.10,000/- or more. And of course, it will take many trips to the Income tax department and lot of time to get it - if at all.

Update on 30-10-2007: We made an application. Our CA was told upfront that it would get rejected. Why? Because we had paid self-assessment tax in the previous 3 years! Isn't it normal thing to do? What a logic!!

Well, what about 'merit' of the case? Well we can file an appeal to them when it's rejected! About 15 days back we got the rejection letter. What next? File an appeal - what else?

Update on 1-4-2008: No I'm not making April Fool. We got the Certificate of lower deduction from Income tax under section 197(1) at 1.4% on 15-3-2008. We got it after lot of arguments, loads of papers and paper projections and lot of sweat. What's validity? It's valid up to 31-3-2008. We could not use it because we could not find an existing customer in this 15 days - who was going to deduct TDS in this 15 days. Sad!

Update on 9-8-2008: We applied for the same certificate once again in April 2008 with similar load of papers. We got it on 12-5-2008. This time it was for TDS at 1.5%. It's useful.

Another case: We had sold Software Maintenance to a large Bank. Payment came with 4.25% deduction. When TDS certificate came after lapse of 15 months we realised that certificate was for only 2% amount. What about balance 2.25% deduction? Upon inquiry we learnt that it was towards WCT (Works Contract Tax). Well, we told cusotmer that WCT is not applicable on Software Maintenance. They said nothing can be done now (after 18 months) because it is already deducted and paid to the government. What about the certificate? We will get it. What do we do with it? We are thinking of framing it in a nice photoframe and write 'thanks to tax laws in India' this certificate worth more than Rs.30,000 is hanging on our wall.

That's life in India.

Any comments or suggestions?

Taxability of Digital Signatures and Certificates

Indian Information Technology Act 2000 came in to force about 5 years back. Among many things - it laid legal framework for making digital signatures on par with the physical signature of a person. Also it laid legal framework for issuance of digital certificates to certify/identify owner of a website as a particular person or an organization; and also to facilitate secure communication between the end user and the owner of the website over internet.

Currently there are number of organizations who are permitted to issue such digital certificates. For example, Safescrypt Ltd, Tata Consultancy Services, MTNL and few more. Person or Organizations desirous of getting such digital signature/certificate have to pay a certain fee or price for the same. These digital signatures/certificates are valid for a period of 1 or 2 years from the date of issuance. After the expiry - digital signature/certificate is re-issued after due verification and payment of renewal fee or price.

The issuance of digital signature/certificate has two deliverables. First one is related to checking and certifying existence of a person or an organization. The process involves submission of documents like Signature verification from bank, proof of doing business e.g., Certificate of Incorporation issued by Registrar of firms etc., Copy of Voter's identity Card etc. Second part is issuance of digital certificate by the supplier. Digital Signature/Certificate is used by the user (person) or organization to sign documents, establish website's identity on the internet, encrypt files/documents, securely communicate with internet users etc.

Surely, it's a welcome step towards embracing digital age of Internet and Information Technology by laying down legal framework. But any enacted legislation becomes effective only when entire eco system is geared up for its existence. Firstly act should be backed by making suitable amendment to the related acts e.g., what will be tax implication of digital signature/certificate issuance, in case of any legal problem how will audit trail of entire process will be kept and accepted as evidence in court of law etc.

It is quite sad to note that hardly any state governments have modified/added or clarified applicability of Sales tax or VAT on sale of such digital signatures/certificates. Although sale of these digital signatures/certificates have been going for almost 5 years - there is no clarity on such vital issue. Also, Central Government is silent about applicability of service tax on issuance of digital signatures/certificates. This problem get compounded in certain states where entry tax or octroi is charged on entry of goods/services.

It is high time that state and central government understands this trade issue and makes suitable amendments by correctly classifying digital signature/certificate under existing or new category and giving clear direction on taxability.

More on Right to Information Act

Just learnt this piece of information from Mahendra Tyagi. He is a whistler blower in Indian Oil Corporation (IOC). His wife sought some information from ministry of Petroleum about some issue at IOC under Right to Information Act. They replied to her that her query is referred to IOC and they will reply to it!!

Do you remember what happened when Satyanarayan Dubey wrote to Prime Minister's Office about corruption in Golden quadrilateral Project? Isn't this situation very similar to Satyanarayan Dubey's case?

Crucial point to be noted here is, when a certain answer is sought from a particular ministry they are supposed to answer it. They can not absolve themselves by referring the question to some one else. I'm sure there should be some provision in the Right to Information Act so that such thing does not happen. If it happens then there should be some remedy to correct the situation. If not - then situation is very similar to what an ordinary citizen experiences every day while dealing with government departments viz., "running from pillar to post".

And worst thing is that - when a query is made to a higher authority - how can they refer it to some one down the authority line i.e., ministry of Petroleum is asking IOC? Particularly, this thing assumes very serious proportion because complaint/query is raised against working of IOC. Without any doubt this situation is absolutely same as Satyendra Dubey's case.

We could not do anything about Satyendra Dubey, but this time situation is little different. Currently Right to Information Act is already enacted and surely ministry of Petroleum can not shirk their responsibility. We need to get together and help Mahendra Tyagi and his wife to get answers to the question they are asking. Certainly we do not want another Satyendra Dubey. Isn't it?

We can not and should not remain moot spectator to such callous attitude of Government Departments. It used to be like that - but not now. When Act is in force they should give answers. What do you say?

What's use of authorized service centers of car companies?

Yesterday spent half a day getting my Indica diesel car problems corrected.

Day-before I had visited one authorized centre for Tata Motors at Andheri (East). I'd gone there to get Basic free service done (given by 3rd party) and to get low pick-up experienced during last few days solved e.g., whenever I start the a/c, car would stop. Also there was a problem of screeching noise from the belt while climbing a slope in 1st/2nd gear.

Upon inspection of my Indica Diesel DLE (year 2000) model, head mechanic told me that car engine is having back compressor problem viz.,., engine oil is splashing from the engine-oil-level-check-vent - because pistons walls have enlarged, EGR motor is not working, excessive black smoke is coming and belt noise is there in 1st/2nd gear. He suggested complete overhaul of engine Rs.5,500/- Engine Kit-Rs.12,000/-, Fuel Pump Setup Rs.5,000/-, Engine Boring etc Rs.5,000/-, Air-conditioner Gas refilling etc. etc.. Total cost about Rs.35,000/- to 40,000/-. Bill of Material added up to Rs.40,000/-!! I fled.

Yesterday visited neighbourhood garage. Upon quick inspection mechanic suggested replacement of air filter (Rs.120/-), diesel filter (Rs.160/-). Changed rubber exhaust hose from engine (Rs.50/-). Slight improvement. Mechanic removed the silencer from the exhaust pipe and lo! Except noise from exhaust everything became perfect. So changed the Silencer (Rs.650/-) and tightened a nut to stop the screeching belt noise. Car is running like a new one. Total cost Rs.1,200/-.

So, what's lesson from this story? It was silencer that had got clogged - due to which exhaust gas was not able to go out, creating pressure on the engine. Was it error of judgment or cut-the- bakra (goat) attitude?

Looking at my 5 year old car could the mechanic not have guessed/checked whether exhaust system is working properly or not? In stead, he straight-away blamed engine for the low pick-up! So, can we trust authorized service centers? Probably not. If yes, then with loads of pinch-of-salt. Why does this thing happen? One reason is high man-power turn over. In small garages same owner works till he hands overs reins to either his son or some other trustworthy person. While in authorized garages, I bet, you won't find same person after a few months. It's not a fiction. It's a fact of life. In other words - knowledge does not accumulate in authorized garages. Every time is a new game. Then why the hell do we go to authorized service centres? To get fleeced? Not sure. Any ideas?

This situation I have seen in Information Technology field also. There are many certification courses. Course and exam fees are truly exorbitant. Those who pass certification say CISCO, MCSE, CNE etc. have just passed exams. It's amply evident from the trainers attitude towards the exam orientation. If a person with industry experience attends this course - he would decide to not to take exam and would ask for refund. What this certified guy have is is a bookish knowledge - it's just enough to pass exams and not more than that. If they know something - it's only because of real life field experience.

Coming back to authorized garages - they have got latest equipments, a/c office, english speaking staff, computers and car mfg trained/exam passed technicians etc. These garage owners are in a hurry to quickly recover their investment by fleecing customers. On the other hand, streetside garage owners may not have latest equipment or knowledge of english; but would have their skill and gut-feel well honed to solve real problems with practical solutions.

This is my second experience of Tata Motors' authorized service centre. First time, about two years back I had visited another authorized service centre in Vikhroli to solve excessive black smoke emission issue. After visiting them 3 times; and no solution to the problem - I complained to Tata Motors. Due to that I got few calls from the garage to visit again but I refused because I did not wished to get serviced by in-experienced had lost trust. That was about 2 years back. So, I thought situation would have improved. But no, it's all same.

So, am I smart fellow who saved about Rs.35,000/- or a fool waiting for some disaster to happen? Not sure. But at least for now, I'm happy that my car is working fine.

Right to Information Act

It's my experience that - in India - people and organizations are experts in hiding information, giving in-complete / confusing /partially correct / false information. Remember joke where an Indian Chartered accountant in competition with certified accountants from USA and Europe says "how much do want 2+2 to be?". Why such a situation? Because by doing it is very easy to make money and gain power. Vast majority of India believes in it and practices it whole heartedly.

Right to Information act is a little first step in the right direction to root out this corruption. And we have to go a long way before it start giving meaningful results and making difference in the lives of ordinary citizens.

To illustrate my points I'll cite few examples to show how information is made available at present:

* Information is old e.g. official website of Municipal Corporation of Greater Mumbai has published license fee rates to be paid under 'Shop and Establishment'. It shows rates prevailing in the year 1997. The rate have been revised at least once in 2004 but website still shows 1997 rate table. It is not updated. Why?

* Visit government of India passport site and try to find out how and where to get duplicate passport - when your original passport is damaged say due to flood in Mumbai on 26-July. Site asks you to download a form. It's same as for a new passport! Great. Visit Passport office enquiry counter and they will hand over a very different form that clearly states that it's for getting duplicate passport. Which one is correct? Both are!! How do I know? because I've seen passport office accepting both forms!!

Now how to apply? Web site says visit Passport office and give application. Online registration is for new passport only. Visit an agent he tells that he will do everything including online registration. So, to double check you visit the web site and try to apply online - and you are presented with an option for duplicate passport!! How come? God only knows. Well I did the registration and given time between 12:30 pm and 1:00 pm. But upon personal visit I understand that once online registration is done - one can visit the passport office for next 3 days.

* Which all places one can submit application for a new Passport in Mumbai? Official site says it's at Worli and two Post offices viz., GPO, Fort and Andheri. What they do not mention is that Passport application is accepted at few other places also. One place I know is next to St. Xavior's College, Opp. Metro Cinema. If you call Passport office on phone they inform that it's accepted at Chembur also. Why this crucial information is not made known at the web site? Not only that - it is not mentioned on the notice boards of Passport office worli also.

* My property document (Agreement for Sale) was given to Stamp Duty and Registration office at Old Customs house, Mumbai for registration (after payment of stamp duty) in 1994. And till 2005 I did not hear from them. Several personal visits did not yield any result. Then in 2005 under Right to Information Act of Maharashtra, I made an application seeking details of pending applications between 1991 to 1995 and what is being done to register such documents.

I got reply saying about 2 lakh documents are pending for this period and work is given on Built-Own-Transfer (BOT) basis to one Pune based party, scanning of all these pending document is in progress and it is expected to get over by December 2005. They said they could not tell me how much registration fee was collected from these pending applications; also they could not tell me value of such pending documents because information was not available.

Question is - when specific reply is sought - how can they say that information is not available? Certainly information is there but one has to compile it. But reply given is - it's not available.

Another thing, my document was in Mumbai only and I've with my own eyes seen thousands perhaps lakhs of original documents lying in Stamp duty/Registration office meaning thereby that they have not been sent to Pune - so that they could get registered by Dec 2005. In fact, I got my document back duly registered in 1st week of Dec 2005. It was lying at Mumbai only and by no means it would have got scanned and registered at Pune - as claimed by the answer given to me.

My question is - if we get in-correct information like in my case - how do we catch them? What could be done under the act to catch such in-correct information providers and possibly book them? I'm not sure.

Hope you got my point from above experience. Information is simply not available in an easily understandable, cohesive and simple manner. One has to toil for it. Why? Otherwise how will agents and brokers make their living? Simple - isn't it?


Another problem - In India, one invariably looses why dealing with government. How? Read below:
* When you make payment to government for 3 years say Professional tax - if it is revised upwards inbetween - then you save money. Right? Wrong if you have made payment to Municipal Corporation of Greater Mumbai. I paid Shop and establishment department for 3 years together - based on 9 people working in my company for the period 2003 to 2005. When I went to pay for another 3 years in Dec 2005 - I was asked to pay additional Rs.2,400/- because rates were revised and slabs had also changed in 2004. I argued that since we had paid for 3 years - revised rates were not applicable. I was told - MCGM accepts payment for 3 years together for customers convenience only. One can pay every year also. Fine. Accepted.

Why was I asked to pay extra? Because slabs had got revised and because I had 9 employees as per new slab of 6-10 employees Rs.1,200/- per year extra is to be paid. But I realized that in 2004 I had only 5 employees i.e., 4 people left in 2003. But to that MCGM argued that I informed them about it in Dec 2005 (although change occurred in 2004).

But when I have paid for 3 years in advance is it not MCGM's duty to demand extra as soon as it becomes due/applicable? They did not. And when I went to pay for next 3 years they charged for it and blamed saying we did not inform them in time about change of employees. This is too bad! One feels cheated.