Service taxation of packaged software

S Madhavan, New Delhi
Business Standard
Budget 2009 contains important proposals in regard to exempting packaged software from customs duty, on importation, and on excise duty, with regard to domestic supplies, to the extent that such software is purportedly chargeable to the service tax. In other words, these proposals attempt to redress the problem of potential double taxation that arise in regard to such software.

Earlier articles in this column had highlighted the problem of double taxation in relation to several transactions. This article however analyses the implications of the proposals and considers the extent to which the issue of double taxation has supposedly been addressed.

In order to better understand the issue, it is worthwhile to consider the manner in which such packaged software was brought to tax under the excise and customs provisions. The excise and customs tariff for Heading 85 23 is in relation to several media for recording of sound or other phenomena, whether or not recorded, and Heading 85 23 80 20 is for information technology software.

It must thus be understood that both the excise and customs tariffs are applicable in regard to software resident in tangible media. This is an important point since both the tariffs extend only to excisable goods that are enumerated in the schedules thereunder and not to any other goods. The excise rate is 8 percent on such software and the basic customs duty is exempt. Thus, both imported and indigenous software are charged to 8 percent duty.

Now, the Interpretative Notes to the Customs Valuation Rules also stipulate that the charges for the right to reproduce the goods in the country of importation shall not be added to the customs value.

In addition, the relevant general exemption notification under the Central Excise Tariff exempts customised software on media from the duty and limits the applicability therefore to packaged or canned software which is defined to mean software developed to meet the needs of a variety of users and which is intended for sale or capable of being sold off the shelf.

In contrast, the service tax provisions extend to services and not to goods. It is thus worthwhile to look at how the service tax was extended to software in general. The definition of information technology software services inter-alia extends to the following:

“Providing (this has replaced the earlier word “Acquiring”) the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell the information technology software and the right to use software components for the creation of and inclusion in other information technology software products.” Consequently, the service tax extended to transfers of right to use such software.

The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers