Slow, steady and sure death of the Packaged Software Industry in India

It takes Government of India to create a huge great mess - which even God can not create with all powers to His command. Why don't for a while, it keep its hands off on matters it does not understand well? I'm referring to IT software and its delivery models. If they don't understand it, helping hand is extended to them from ISODA (Infotech Software Dealers Association - http://www.isoda.in/), but who wants to acknowledge that a mess is created; and clarity is due to the citizens of India?

Let me put it in plain terms. Government of India (that includes bureaucrats and politicians, all together) is out there to kill the proverbial Golden Goose. They have found the proverbial whipping boy in Indian Software Industry. Whether it's Income tax department, Customs/Excise/Service tax department, State Government's Commercial Tax (VAT) departments or even local Municipal Corporations - it's all same. They are utterly clueless about how to tax (in other words, get their cut) from the neo rich Software Industry. They don't understand it, they don't want to understand it; and they are doing a pretty ugly job. And people are fad up of them.

Let them understand, if at all they want to understand, that due to their acts prices of packaged software have gone up by 30% to 40% compared to what they were in May 2008. And people have reduced purchase of packaged software by more than 40% since then. One reason is they can't afford to pay more for (already) costly packaged software. Another things is that they are willing to take risk associated with piracy. Simply because friendly neighbourhood computer supplier OR systems integrator OR facilities management contractor is ever ready to oblige him.

And, if one is in self service mode; and is willing to do little research on Internet, hundreds of sites are available to supply free download of software. Not to forget that they don't forget to send virus, malware and trojans free of charge to you along with the software download to keep their operations going! Thousands of sites are there offering cracks to bypass vendor's activations. Hundreds of well written articles, videos and tutorials are there telling users how to use the latest and best software products free of charge without worrying about vendor's detection and activation.

Can Government do anything to stop this? I'm afraid, even with their best intention, vast machinery and power they can't stop it. Industry is trying its bit but they are also on the wrong track. First they have get their pricing, licensing and distribution model right. But, unfortunate part is that 'god fathers' of software industry are sitting overseas in comfortable high rise offices, with very little knowledge of ground realities in India.

Only way to stop this slow and sure death of software industry is to bring back sensibility and become reasonable. People are there to pay taxes and high prices, but don't corner them. They are ready to purchase packaged software products provided tax rates are reasonable, laws are clear; and they are not threatened by the vendor to purchase the packaged software. No body like ambiguity and threats - least of all - a common man.

Don't think that with GST (Goods and Services Tax) this confusion will be laid to rest. Sorry. I don't agree because first of all there is no clarity whether packaged software is a goods or service. And in GST there are going to different rates of tax for Goods and Services. If 'packaged software' continues to be both goods and a service then even GST won't able to help it.

In Income tax, there is even a bigger problem. Income tax department wants to tax income from sale of software products saying it is a 'royalty' income; and not a business income. Why? Simply because business income of a overseas supplier is not taxable in India. For example, when HP from USA/Singapore sells computer hardware to a distributor in India, his income is taxed in USA/Singapore and NOT in India.

But as per prevailing laws of India, 'royalty' payment made to overseas supplier is taxable in India. Income tax law is extremely complex and confusing with respect on 'royalty' income. So, Income tax department says that payment made to overseas supplier towards purchase of IT software is a 'royalty'. So, the supplier has to pay tax on the same in India. Income tax department wants its pound of flesh from the hapless software industry. You will say, so what's issue? That means importer is required to pay 'withholding tax' to Income tax department when a software product is purchased from the overseas markets, even when purchased through Internet.

What happens when the overseas supplier refuses to pay 'withholding tax' to the purchaser? And what happens when the payment is made through credit card to the overseas supplier? Of course, person who has purchased it pays the tax from his own pocket, a tax that supplier should have paid. Isn't it ridiculous? But, it's true.

There are simply too many factors working to ensure slow, steady and sure death of the packaged software industry in India. Let me try to list them here below, not in any particular order.

1.  High prices of packaged software products
2.  Ever changing and unclear channel /distribution policies of Vendors
3.  Attitude of distributors towards channel partners
4.  Unreasonably high taxation

a.  10 - 20% Withholding tax on import payment - depending upon country of origin
b.  8% CVD on Media
c.  10% Service tax on 'Right to Use' portion of software at the time of import
d.  10% Service tax on Resale
e.  4% VAT on Resale
f.   3 - 5.5% Octroi / Entry tax on Resale
g.  10% TDS on payment from the supplier
h.  10% Service tax and 10% TDS on Incentives, Rebates and Overriding Commissions

5.  Widely fluctuating Indian Rupee to US Dollar Exchange rate
6.  Reluctance of overseas suppliers to pay withholding tax; particularly on Internet
7.  Easiness of Piracy due to easy availability of resources
8.  Attitude of people i.e., we will manage, when it comes
9.  Channel partners who are happy to be in transaction mode with very low margins and high risk - from Government due to taxation compliance, vendors due to changing channel policies
10.  Poor unity and low communication and collaboration among channel partners
11.  Vendor's direct contact and control on the customers
12.  Direct selling by the distributors to the end users

What's 13th factor?

Online photo print service in India

In USA and many other countries, online photo print services are quite an established business. But, recently I discovered a good quality service provider based out of Mumbai, India.

When I saw their mailer (e-mail) they said they would give 10 No.s 4x6 prints free. Yes, you read it correct - FREE!! I checked that they were based out of Mumbai and decided not to make any payment to them by credit card. They had option to pay cash at one shop located quite close to my office.

So, I went ahead and uploaded 10 best photos of my Kashmir tour and ordered the prints. They charged Rs.25/- plus tax as delivery charges. They sent a number through SMS to my mobile phone; went to the shop, made the cash payment and they issued a receipt of Rs.28/- or so. And within seconds I got SMS saying money was received and prints would be delivered in few days.

It did come - as promised to my place. My first and second impression about this service (http://www.zoomin.com/) is too good.

Today I got an offer saying if I order 1 photo mug, I get second mug free. I ordered 4 mugs with 4 Kashmir photos and fitting caption. All customised. This time I decided to pay through Credit card. This site has Thwate SSL certificate and after accepting my credit card details over a secure SSL connection; transferred control to my bank's website for another verification, and control came back to www.zoomin.com after verification. So, that's how the payment part got over without any problem.

Usability of website is too good to be from India. They allow unlimited photo uploads. You can create albums for private and public use. You can order prints not only on paper but on mugs, t-shirts, calenders etc. etc.

Kashmir tour

After many posts letting out my steam, I'm posting beautiful pictures of Kashmir valley.

It's a long journey from Mumbai, when you travel by train and road. But it is worth every meter you have travelled. It's truly a heaven on earth.

I liked the people there. They want peace and stability as much as rest of the world. Let's pray that peace and tranquility will prevail in this part of the world.

Kashmiri family traveling in Daal lake


Water skiing in Daal lake


Mughal Garden in Srinagar

River in Sonmarg

Mountains in Sonmarg

Houseboats in Nageena Lake with reflection in water

Beautiful view in Gulmarg

View of hotels in Gulmarg

View of mountains in Pahelgam

River in Pahelgam

Pictures taken with Kodak 8 MP camera with 3x Optical Zoom.

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.

Quality of Service provided by the Service Providers

I remember hearing an episode from my Master about quality of work done by people from India. Many years back in the British newspapers Churchill’s remark about loose wires hanging on the wall attributed to 'some indian must have done the electrical wiring' had attracted furore from Indian elite of his time. But after narrating this episode my master said “Churchill’s observation was correct. How much True it is?.” He went on to explain that we never take 'pride' in what we do.

It is quite sad that even after lapse of 50-60 years situation is very much similar. Although India has emerged as a hub of 'call centre' for the world and MNCs like Dell and others outsource their work to India - looking at quality of services offered - I'm convinced that this boom also will die the death of 'dot-com' bubble. It may not be that fast or sudden but it is written on the wall. Companies giving this outsourcing work to India will realize soon that it's not worth the saving. They better have few people on the job giving quality service than to give it out to Indian who has no concept of what service is.

This comments many seem too harsh but you can prove to yourself that it's 100% true. Just try calling any private or MNC bank in India; or any telephone company for some help; or any good insurance company. I've personally tried taking help on simple issues from ICICI Bank, CitiBank, ICICI Prudential Insurance, SBI Credit Cards, SBI online banking, BPL Mobile for Blackberry Services, Dell for Sales and Technical support, Principal of the D J Sanghvi Engineering College in Mumbai and story is alarmingly same. If you don't bang your head and/or phone and feel like pulling your hair and start curing your decision to take help from this service providers.

Believe me, Indian Government is not justified in charging us 12% Service Tax on Services that you get in India. Service tax should be on 'real services' and not on the 'harassment' in the name of service. May I suggest that Government should call it 'Harassment Tax' because in the name of service we get only a harassment.

I've to really make a great effort in remembering any incidence where I would have got a prompt, simple and correct answer from the service provider. Not that such incidents have not happened ever but they too miniscule in number (say 0.5%) .

You may reason saying I may be too demanding and that's why I'm feeling what I'm feeling. But that's not true. In fact, I'm surprised by the wondering that if I'm - a well educated - tech savvy person is getting such shabby answers from call centre employees and their supervisors; what an ordinary person on the road must be experiencing and feeling?

How is the salary that call centre executives and supervisors and manager is justified? Have you ever managed to speak to a call center's manager? I've never managed it. A call centre supervisor has got 100 tricks to ensure that you give up. Of course, I'm sure usage of such tricks would definitely lead to ulcer and/or heart attack. But, that's what they are getting paid for.

I wonder, what could be the remedy? When would we Indians start taking pride in the work that we do? When will we become disciplined? Even highly educated people are not free from these problems.

I think, it’s time that we stop accepting this non-sense without any fight. Time has come to assert our rights. It’s only we don’t tell that we ‘deserve’ better treatment that we get such treatment. Time has come when we start revolting. If we don’t – no body will.

We should stop saying that ‘who has the time’ to do all this? Agreed, most of us do not have time or energy to put this additional fights but some one will have to. If we don’t help ourselves who will help us? It’s time that we wake up to the fact that Government is not going to do anything unless we demand it forcefully. Courts are not going to help us unless we have infinite time and resources (money). Courts have ceased to a ‘pillar’ of democracy. Media is busy serving interests of ‘rich and powerful’. Who is going to serve us? No one, except ourselves.

Start hitting back whenever you are shabbily treated. Pick-up pen to write letters. Pick-up courage to speak up - without any fear. Demand and you shall get. Knock and door will be opened – Jesus said. It’s time that we take responsibility for ourselves in our own hands and stop depending upon Government, Courts and Media.

Tell me what is a “Packaged Software” license?

Is it a purchase of “Goods”, “Service” or a “Royalty Payment"?

The idea of “duality” has deep roots not only in Indian Philosophy - where God is supposed be ‘dvaita’ as well as ‘advaita’; but such duality is in modern science also.

In Science, debate over the nature of ‘light’ and ‘matter’ is dating back to the 1600s, when various scientists proposed competing theories of ‘light’. It was through the work of Albert Einstein and many others that current scientific theory holds that all ‘particles’ also have a ‘wave’ nature. That is, 'light' has a dual nature i.e., it is a 'wave' as well as a 'particle'. When light hits a photosensitive material it generates electricity due to its particle nature.

Our Government – which seems to have no equal any where in any other country – have discovered another duality – in fact a new ‘tri-ality’ (for want to better expression let’s say this) about ‘Packaged Software’. It has found that “Packaged Software” is three different things depending upon how you look at it. If you look at it from the view of State level taxes - it’s a ‘goods’. If you look at it from Indirect Taxes point of view - it’s a “Service”. And if you look at it from Direct Taxes (Income Tax) point of view - it’s a “Royalty” payment made to the software developer.

You will say – so what? After all, in India we have more than 5500 laws and more than 100 taxes. We are paying so many taxes. And double taxation is not new.

Of course theoretically Double taxation should not be there and could be corrected. But, for that, once it is there, one need to make a writ petition in the High Court or Supreme Court OR approach some political party for the correction in the law/act. Another alternative is, if you are able to put-up with it, pay double tax. After all, it is not paid from the reseller's pocket. It's the customer who is paying then what’s the big issue?

Let’s look closely to understand this.

If you look at it from State’s point of view (for the purpose of “Value Added Tax” or “Sales Tax”) - Packaged Software License is a “goods” – without any doubt. There are number of court cases and it’s a well settled legal view that “Packaged Software” license is a “goods” and it attracts 4% VAT. It is fine up to this point.

But, if you look at it from the Centre’s point of view (for the purpose of “Service Tax”) Packaged Software License is a “Information Technology Service” (IT Service). Government woke up to this reality as late as in February 2008 and introduced a new service in the list of taxable services during the 2008 budget. With effect from 15-5-2008 all IT Services became taxable under Service tax net.

So, all companies involved in the business of selling Packaged Software Licenses started charging “Service tax” at 12.36% (inclusive of 3% Education Cess). And then to give its due to the 'State' – they are charging “Value Added Tax” at 4% on the total of License Fee and Service tax.

Everybody thought - that’s it. We can manage it i.e., customer will understand somehow that if ‘duality’ is there in ‘Religion’ and ‘Science’ - so it’s not difficult to accept that it could be there in Government taxes also. More or less, most of the customers came to accept the fact that they have to pay double tax - although it’s against the principal of double taxation.

Of course, we have heard that there are some software stalwarts like a large Software Company from Tata Group, which refuses to accept such dual nature of Software because they deal with Software licenses day-in day-out; and who would know it better? So, we understand that they have stopped purchasing Packaged Software products with double tax!! Of course, one may ask - how would they manage without purchasing any packaged software? Simple, they use open source software or they would develop it in-house. After all they have all the resources!!!

Any way, that’s besides the point. There is another twist to the story. In other words, plot thickens now. Don’t underline our Government's ability to create situations which would put even Hollywood film stories to shame!

Story goes like this – Software dealers started billing dual tax to customers in the routine manner (after fixing their Invoicing software, of course) – thinking that that’s it. But when they got payment for the packaged software licenses from the customer, they got a rude shock. They got cheque of only 89% of the Invoice amount from the Customer. Upon inquiry they found that customer had deducted 11.33% as TDS (Tax Deducted at Source aka Income tax) from the payment.

You would say ‘big deal’ - the dealers would pay that much tax less while making advance tax payment. Theoretically yes, but practically no. Why?

A typical software reseller makes about 2 to 4% gross margin on the sale of the packaged software license. So, he purchases it at say Rs.96, sells it a say Rs.100 – considering the best margin case. He bills it to customer at Rs.117 (100 + 12.36%ST +4%VAT). And customer pays him Rs.104 after deducting Rs.13 towards TDS. Reseller pays Rs.17 to Government towards Service tax and VAT – so reseller is left with Rs.87 in his hand. So, net – net he has lost Rs.9 per 96 i.e., he lost 9% from his cash flow. So, tell me after how many such transactions he would be left with no cash flow? You need to be ‘panchvi pass’ to answer this simple question.

Hey boss - don’t be ‘संतुष्ट’ (यार, SRK overtakes me sometimes) with 2 to 4% margin – ask customer to pay 9+4 i.e., 13% margin. Hey, that’s an unlucky number. OK let’s earn 15% gross margin. After all – reseller also needs to make money sometimes. Isn’t it? So, overnight price of Packaged Software license went northwards by 15%. Of course, this increase was over and above the 13% extra that customer shelled out towards Service tax and VAT on Service tax. So, in July 2008 all Packaged Software licenses became dearer by 28%.

End of story? नही यार. Plot thickens now. Some software distributors figured that if they paid 12% CVD (aka Customs Duty) while importing the Packaged Software license then suddenly “IT Software” turned from “Service” to “Goods”. So, when 12% CVD is paid - only 4% VAT would be payable; and no service tax! Wow, it meant that no TDS also. Great solution! After all, Indians are good at finding solutions. We are giving software solutions to the whole of USA and many countries in the world then why not for India. Isn’t it?

So far, before this happened, packaged software license was imported in to India by payment of ‘nil’ customs duty. Whether software was imported as a “paper license” or “software download from Internet” it did not matter. And this was more-or-less in line with GOI ‘s commitment to WTO in 1996 that by 1st June 2000 India will reduce customs duty to zero for 94 IT related items; and other IT items would have zero duty by 1st January 2005. Of course, one anomaly existed viz., if you imported packaged software license in a ‘shrink-wrap’ box then you paid 12% Customs duty. But considering the yearly volume and value of import under category - which is about 2 to 3% of the total packaged software license import – most people ignored this anomaly.

So, at least for some time – software resellers thought that by payment of 12% CVD problem of Service tax and TDS got resolved. But no, our Service tax people are smart. They are not going to give up that easily. Text of the law is in their favour. They have every right to ask each reseller to pay up “Service tax” because they have already tasted the ‘blood’ in this few months. So, software reseller community is keeping it’s fingers (and blood vessels therein) crossed. They are hoping against all hope that Service tax people will be content with revenue they have raked in so far in this 2 months.

But matter is not over yet. In January 2008 news stories had appeared in press that Microsoft was asked to make payment of about 700 to 800 Crore rupees towards Income tax. Also, in July 2008 a Supreme court judgment - in a case involving software imported by Airport Authority of India from a US supplier – it was held that Income-tax was payable by the US supplier in India because payment to them towards software license purchase by AAI was in the nature of ‘royalty’ payment. This was in spite of the wordings of the license agreement, which stated categorically that it was ‘a grant of license to use the software’. If one reads the Microsoft case judgement – it also seems to say the same thing i.e., payment received by Microsoft – although it was through a well-laid distribution network – was in fact an income towards ‘royalty’ payment; and not a ‘business profit’.

So, what does this view from “Income tax” mean to software resellers? It means that customers will keep deducting TDS from their invoices because customers are making payment towards royalty. So last I have heard is that all software resellers are queuing up outside the Income-Tax (TDS) department to apply for the Certificate under Section 197(1) (See Rule 28AA) relating to deduction of tax i.e., lower TDS.

Also, it was heard that price of all ‘downloaded’ software went upwards by another 10 to 20% depending upon from which country the software was procured. Why this? This is to pay the ‘withholding tax’ (aka Income Tax or TDS) to be paid to the Government towards income tax on the profit made by the non-resident supplier in India. This income tax on the profits made by the non-resident supplier seems to be payable by the ‘importer’. Of course, if the non-resident supplier agrees and if India has DTAA (Double Tax Avoidance Agreement) with that supplier’s country then importer may deduct TDS from the payment. But if importer is unlucky – which most likely the case – then importer will have to pay this tax from his own pocket.

Can it become more complex than this? We bet it can – but only in India. We still have our friendly politicians and bureaucrats who can make it still complex. They are capable of inventing ‘fourth’ nature of “Computer Software” licenses - apart from ‘goods’, ‘service’ and ‘royalty’!!!!

But those who are engaged in the business of software license reselling in India have got fad up of all this tax non-sense. Although they are merely 200 to 250 in number (all over India) they have got together and formed an association called "ISODA" - Indian Software Dealers Association. They have already initiated many steps to protect their interest. More on it can be found at http://www.isoda.in

p.s., one question is still unanswered. When a customer purchases ‘Computer Software License’ – how will this payment be classified as? Will it be a revenue expense, royality payment or a fee towards a professional service?

Don’t break your head. Just put this question in the next year’s Chartered Accountant’s (CA) exam. We have heard that only 2% candidates "pass" the final CA exam. But if this question is included in the exam then no one will pass next year’s CA exam. You bet.

Long live India and it’s harried citizens.

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.