PACKAGED SOFTWARE MAY NOT CARRY SERVICE TAX SEAL

Deepshikha Sikarwar, New Delhi, June 8, 2009
The Economic Times

The government may withdraw service tax on packaged software in the Budget in a move that will make it cheaper and remove the burden of paying tax twice.

Retailers of packaged software, such as SAP, Oracle, Adobe, Microsoft, along with those that can be downloaded or bought as compact discs off the shelf, will benefit if the 10 percent service tax is withdrawn.

Last year’s Budget made it necessary for packaged software to pay service tax by broadening its definition to include ‘the acquisition of right to use packaged software’. This brought packaged software under the service tax net, even though it already attracts other taxes. Paying tax twice on the same software was becoming a burden for the industry.

Packaged software comes with a licence, which allows the buyer legal use of the software. This licence, however, is treated as a good and attracts value added tax (4 percent), counter vailing duty (8 percent) and central sales tax. If the customer is given a CD in addition to downloaded software as back-up, the CD is also treated as a good and liable to pay these taxes.

The Central Board of Excise & Customs, the apex body for indirect taxes, had examined the option of removing either the service tax or counter vailing duty on packaged software. The board is now understood to be in favour of removing service tax, said a government official, who spoke on condition of anonymity.

This is largely because a number of court rulings, including from the Supreme Court, have held that packaged software is a good and, therefore, should not attract service tax.

The government is likely to tweak the definition of software to clear the ambiguity and remove packaged software from the service tax net, the official said.

The total software market in the country is estimated at Rs 10,000 crore with over 4,000 retailers. Selling of software is a low-margin business, with margins ranging from 4-5 percent. Multiple taxes erode dealers margins, making the business unviable for low-volume players. As higher taxes raise the cost of software, the industry believes it encourages piracy.