Service Tax on Providing Information Technology Software – Right to Use – Electronically

In India the I T Industry has been operating well since long now and has contributed to the national economic growth to a great extent. But with increasing number of transactions of sale of I T Products, the commercial issues, disputes have gone on the rise including the Taxation issues like implication of VAT and Service Tax.

In the era of internet the transactions have become easy but yet so complicated that even revenue departments are having hard time to implement the taxation laws both under central and state legislatures. In the Information Technology Industry the Software companies are purchasing software online from foreign companies and they further sell those softwares to the customers in India or they use them for their own use. Generally the Key No and Password is provided to the customers to access such software through internet.

With the introduction of a Service head i.e  Information Technology Software Service w.e.f 16.5.2008 lots of queries have come up from I T Companies in India. The industry is confused about implications of the Indirect Taxes on their business transactions i.e on their sale and purchase of software which are supplied electronically. The issue to be resolved is whether such transfer of software through electronic medium is levied with Service Tax or with VAT or both.

Let us first analyze the provisions of the Service head Information Technology Software Service under Section 65(105) (zzzze) of the Finance Act. According to the above provision of act  taxable service means any service provided or to be provided to any person, by any other person in relation to information technology software for use in the course, or furtherance, of business or commerce, including,

i.   development of information technology software

ii.  study, analysis, design and programming of information technology software

iii. adaptation, upgradation, enhancement, implementation and other similar services related to information technology software

iv. providing advice, consultancy and assistance on matters related to information technology software, including conducting feasibility studies on implementation of a system, specifications for a database design, guidance and assistance during the startup phase of a new system, specifications to secure a database, advice on proprietary information technology software

v. acquiring the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other information technology software products

vi.  acquiring the right to use information technology software supplied electronically

The phrase ‘acquiring the right to use’ has been replaced with ‘providing the right to use’ vide Ministry’s Circular Letter D.O.F. No. 334/13/2009-TRU dated 6.7.2009.

From the above definition under clause (VI), it is clear that providing the right to use any software supplied electronically would be covered under the ambit of taxable services. Mostly the software companies are providing their customer with the right to use software as Key Numbers or passwords therefore it appears that the same would be covered under the taxable net. This has been further clarified in circular no 334/1/2008 TRU dated 29.02.2008 that the Information Technology Software and upgrades of software supplied electronically shall be covered within the scope of the proposed service. Taxation is to be neutral and should not depend on forms of delivery.

VAT or Service Tax on sale of software/ right to use

Till now the packaged software was subjected to double taxation wherein both VAT and Service tax was being levied at the time of its sale. But now the CBEC through the Notification No 53/2010 ST dated 21.12.2010 has exempted service tax on retail sale of packaged computer software classifying the packaged software as goods and not service subject to certain conditions. But the software sold electronically by the companies in the present discussion are not packaged software and hence the same should not be treated as goods at all. When the software sold is not packaged software it should be subjected to service tax only. It is important to observe that in case of software there will be “sale” of software only if source code and entire property in software is transferred to buyer. But in the common parlance there is no sale of software as such as entire property in software is never passed on to buyer. In such cases only right to use a software for a particular period is transferred and renewal fee is charged from the buyer. It is clear that under the service head “IT Software Service” the service tax is to be levied on the fee charged for providing right to use a software.

Import of software/ right to use

Another doubt as to whether service tax or customs duty would be payable on the purchase of software from a foreign party when supplied electronically. It is seen as discussed in the opening paras that the generally the Software Companies receives the key no. and password of the software from the foreign party through e-mail. We have already discussed in the earlier part of our opinion that providing the right to use any software supplied electronically would be covered under the ambit IT Software Services. As the transaction is between the Indian Entity and a foreign party, it is relevant to refer to Section 66A of the Finance Act which provides for service tax on services received from outside India. In such case the services are provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India then such services shall be taxable in the hands of the recipient under reverse charge. The liability to pay service tax by the importer of such service would remain the same whether he is making the payment through Credit card or through any other banking channel. Therefore it is advisable for the Software Companies to pay the service tax on the value of the invoice raised by the vendor company for providing such right to use a Software.

Jeevesh Mehta is a partner in the firm of Maven Legal LLP in New Delhi.  Mr. Mehta is also a member of the LawGuru Attorney Network.

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