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Budget clears air on taxation of IT services
March, 12th 2007
The Budget has considerably expanded the scope of taxable services by way of inserting clarifications or amending the existing definitions of taxable services and also by way of grouping and redefining these definitions. 
 
As a result, the overall coverage of taxable services has been widened to a great extent. This article addresses some of these amendments and their implications. 
 
The taxable category of consulting engineering service, which specifically excluded computer hardware engineering from its ambit with effect from September 10, 2004, has now been amended to omit the exclusion. 
 
It appears that this has beendone to ensure that the service tax is applicable on all services related to the IT sector, with the sole exception of development of computer software and related engineering services, which continue to be exempt. 
 
Another amendment relates to the definition of management, maintenance or repair services. The definition has been refined further with insertion of an explanation thereto in order to hold that for the purpose of that definition, computer software will be treated as goods. The effect of this amendment is that the aforesaid activities carried out in relation to computer software will be chargeable to service tax. 
 
The matter of taxability of maintenance or repair work in relation to computer software has had a chequered history. The definition was first brought into the statute on July 1, 2003. 
 
Thereafter, on August 21, 2003, a notification was issued to exempt these services in relation to computers, computer systems or computer peripherals. Thereafter, the department issued Circular No.70/19/2003-ST, on December 17, 2003, which held that software was not goods, being intangible in nature, and hence the aforesaid services performed qua software were not chargeable to service tax. 
 
On July 9, 2004, the aforesaid exemption notification was rescinded. The Circular was, thereafter, superseded vide Circular No. 81/2/2005-ST dated 7/10/05 which held that software (branded as well as unbranded) was goods, in the light of the decision of the Supreme Court in the Tata Consultancy Services case and hence the above activities in relation to software were chargeable to tax. 
 
The department followed up this Circular with a letter dated March 7, 2006, stating that in view of this Circular, these services qua software stood chargeable to service tax from July 9, 2004, being the date of withdrawal of exemption Notification No. 20/2003. 
 
In the light of this past convoluted history, the aforesaid amendment in the Budget is perhaps meant to resolve the matter once and for all and tax these activities. It is a moot point, however, as to the status of taxation for past periods. 
 
In terms of the law on the point, it appears that the tax could only apply for the period subsequent to Circular No. 81/2/2005-ST, dated October 7, 2005, notwithstanding that the earlier Circular No.70/19/2003-ST dated December 17, 2003, was based on an erroneous premise that software, being intangible in nature, was not therefore goods. 
 
There has been another amendment whereby the coverage of the definition of banking and other financial services has been restricted, by substituting the words any other person with the words commercial concern in relation to service providers liable to pay service tax under the said taxable service category. The objective seems to be to exclude government departments like post offices from the tax net. 
 
Interestingly, the words any other person were inserted in the definition of taxable service in place of the words commercial concern in the year 2006! Thus, the status quo ante has been restored. Cash management services are however now covered under the aforesaid category of service and this would marginally expand the coverage of taxability thereunder. 
 
Another major amendment has been proposed in relation to telecommunication services. The revised omnibus definition covers all telecommunication-related services which were earlier covered under separate taxable categories. 
 
Further, it is proposed that all such services will be taxed regardless of whether or not they are provided to subscribers. The proposal to consolidate the various erstwhile telecom related service definitions into a single taxable category would help in doing away with the various practical difficulties associated with ascertaining the appropriate classification of the several individual services. 
 
Also, the broadbasing of the definition would ensure that all telecommunications services, without exception, are charged to tax and the opportunity to not charge service tax on specific elements of telecommunications services is now no longer available. 
 
The finance minister has, however, acknowledged the demand of the telecom sector to have a single levy instead of the current multiple levies and has proposed that the department of telecommunication would set up a committee to look into the present structure and make suitable recommendations to the government. 
 
S Madhavan
The writer is leader, indirect tax practice, PricewaterhouseCoopers
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