The forthcoming budget may bring cheer to India's 10,000-crore information technology industry as the finance ministry is keen to resolve ambiguities over taxation of software. "We will try to clarify some aspects of software taxation," a government official familiar with the discussions on the issue told ET.

Although, the finance ministry made several attempts in the past to clear the haze over software taxation, its moves have failed to satisfy the industry. Confusion largely stems from the fact that software is sometimes treated as a good when sold on a compact disc, while it is considered a service when supplied via electronic download.

This peculiar nature of software sometimes leads to double taxation, causing hardships not just to the industry but also to consumers. Though, the panacea may lie in the Goods and Service Tax (GST), experts say interim measures are also needed.

"It is expected that implementation of GST shall conclusively settle the confusion which prevails on taxation of software, but in the interim the Centre should decide whether to treat supply of software as goods or services," said Bipin Sapra, partner at Ernst & Young.

In its latest attempt to streamline taxation of software, the finance ministry had exempted service tax on retail sale of packaged computer software to address the problem of double taxation on it. The 10% exemption on service tax is conditional to payment of excise on the retail price if the software has been manufactured or imported. But, this only partially addressed the software industry's problem. Experts say confusion still prevails. "This notification only addressed the problem partly," said Pratik Jain, partner at KPMG.

The issue of double taxation of software -- imposition of service tax and countervailing duty -- still exists for software packages sold with licenses.

The industry was allowed to split the license fee and cost of the CD for tax purposes as the cost of packaged software for institutional customers depended on the number of users. The latest notification, however, removed the provision of splitting.

Industry bodies, such as the Nasscom, have taken up the issue with the government. "We expect clarity on this soon," said Som Mittal, president of Nasscom. The official quoted earlier said the government could look at restoring this provision again as one of the options to address the problem.

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'.

However, sometimes even packaged software comes with a license that allows the buyer legal use of the software. So if this software is downloaded, the user is required to pay service tax at the rate of 10%, and if the license is delivered to him separately, he has to pay excise or countervailing duty when imported.

Confusion over treatment of software as a good or service is not just limited to federal taxes. Some states have also contributed to it by imposing value added tax on the sale of software.