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Software buyers log out as taxing error pops up
February, 24th 2009

A slowing market and multiple taxation, spurred by an ambiguous law, have eroded sales for 4,000 software retailers. The nebulous law revolves around packaged software such as Microsoft Office, gaming, SAP, Oracle, Cad/Cam and Adobe, and customised software like banking program Finacle and others.

Packaged software, which was brought under the service tax net in 2006, can either be bought off the shelf or downloaded from the company Website. The ambiguity and the tax overload comes in with respect to the treatment of the software as a good or a service. When software is downloaded, it is considered a service hence the service tax and when the same software is taken as a hard copy on a disc, it is taxed again, this time as a good.

Thanks to the ambiguity, the Infotech Software Dealers Association (ISODA) estimates that the Rs 10,000-crore software market has seen sales fall by over 40%.

Clicking on the download key which comes automatically to software professionals and customers is now proving to be a regrettable error. Not only does this involve paying extra tax, as it then becomes a service, but it also has ripple effects. The cost of licensed software goes up, thereby hitting sales and piracy gets a free run.

Nasscom president Som Mittal says, An interpretation issue is leading to business being impacted. Packaged software attracts a 12% service tax when it is downloaded, but when the customer gets a hard copy as a backup, 8% CVD is levied on it. We have discussed the issue with the government, but there has been no resolution.

If the customer downloads the software, it is treated as a service, and he pays service tax. However, in most cases, the customer also gets a compact disc of the software, which is treated as a good. He then has to pay value-added tax (VAT), countervailing duty (CVD) and central sales tax (CST).

Apart from the fall in sales, there is a fear that piracy rates which had dropped to 69% in 2008 will shoot up again. The Central Board of Excise and Customs is examining the issue, but a resolution requires an amendment in the law. With elections round the corner, this will not be possible.

The problem has its genesis in Budget 2008, which brought customised software under the service tax net. The Bill passed by Parliament , however, did not contain the word customised, giving tax officials the freedom to interpret the law.

The applicability of VAT and CST on packaged software flows from the fact that it is classified as a good. The sale of licences the acquisition of right to use, held to be deemed sales with packaged software are subject to VAT or CVD or CST.

The new definition of software, following changes in service tax in the previous Budget, brings the acquisition of right to use packaged software under the service tax net, leading to double taxation. ISODA president Devesh Aggarwal says at the end of the day, its a huge drain on the retailers resources . We pay 8% CVD on imported software, 4% VAT, 12.36% service tax and up to 5.5% octroi (in states like Maharashtra). Software is a low-margin (4-5 %) business . Dealers have to pay a TDS of 11.33% and with just a 5% margin , they are paying almost 7% from their pockets, leading to high debt and an unviable business.

While the dealers are directly impacted , developers see them getting selective about which software to sell. Adobe India director (sales) Sandeep Mehrotra says, The tax ambiguity has squeezed the retailer. Dealers are not willing to pick up orders where a customer does not pay 100% on time.

Also, it has pushed up the cost of software by at least 16% and could lead to more piracy. In this economic environment, it is like pulling down dealers. Adds Microsoft India spokesperson, Distributors are concerned. Dual taxation is an issue, were working with industry bodies to sort it out.

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