The finance ministry has exempted service tax on retail sale of packaged computer software to address the problem of double taxation on it.

The move comes as relief to the countrys `10,000-crore software retail industry and the customers who will now have to pay less for software such as Microsoft , SAP, Oracle, Norton antivirus and Adobe.

The objective is to streamline taxation of packaged software, said an official dealing with service tax matters. The 10% exemption on service tax is, however, conditional to payment of excise on the retail price if the software has been manufactured or imported, according to a notification issued by the Central Board of Excise and Customs .

The exemption follows hectic lobbying by the Indian software industry, which had been pushing the government to classify packaged software as goods and not service. Until now, the government considered packaged software as both goods and service when a license was sold.

Packaged software comes with a license that allows the buyer legal use of the software. Post-manufacture or post-import, dealers and distributors will not be required to register with service tax department to pay service tax at each level, said Pratik Jain, partner at KPMG .

The ambiguity arose as packaged software attracted a 10% service tax when downloaded and a customer also had to bear excise or Customs duty on it if he purchased a CD of the software.

The 2008-09 Budget had made payment of service tax mandatory on packaged software by broadening the definition of software to include the acquisition of right to use packaged software. The licence that came with a CD loaded with the software led to double taxation. It had hit hard the retail industry that operates on thin margins of 4-5%.

There are over 4,000 software retailers in the country and the issue was highlighted by the Indian Software Developers Association and Nasscom. The industry was of the view that multiple taxes not only raised the cost of software but also encouraged piracy. Experts, however, say more clarity is needed on taxation of software.

This notification addresses the problem only in a limited way, said Bipin Sapra, partner, Ernst & Young. He said there was still ambiguity in the case of industrial or institutional users. The software industry is allowed to split the license fee and cost of the CD for tax purposes as the cost of packaged software for institutional customers is decided on the basis of the number of licenses or users. But the latest notification has done away with the split provision.