Inclusion of a new services category--Information Technology Software Services-- within the ambit of Service Tax legislation has created confusion among the software firms in India. The levy of this new service along with other services has become effective from May 16, 2008.

Post the notification many feel that from May 16, 2008, packaged software will attract 12.36 per cent of service tax. So far, packaged software attracts Value Added Tax (VAT) of 4 per cent and 12 per cent of excise duty.

The confusion arises as the notification does not make a clear demarcation of whether software' is to be sold as a good and hence liable for sales tax (VAT) or considered as services' and liable for a service tax.

Packaged software are products that are sold off the shelf. Some of the products that would fall under this are from, Microsoft, Autodesk, Adobe and several security software packages for the computers. This will also include accounting software from Tally.

According to industry players service tax, payable to the central government, is applicable when a service is offered. While VAT is applicable when a product is sold.

Som Mittal, President, NASSCOM said: "Service tax, VAT, excise duty all are issues that have come up relatively recently in our sector and sometimes there may be possible anomalies in these. Since software is sold both as a product and service, it is liable to be subject to multiple interpretations, such as the case now. NASSCOM is continuously working towards solving such issues on an ongoing basis. We are in discussion with the various stakeholders on this issue as well and are looking at resolve it at the earliest."

Software providers, distributors, vendors and customers are all in a state of confusion and are waiting for some sort of clarification from the government. "The recent announcement has no clarity as to the implications. How can one ask for service tax on something that has been declared as goods? Besides there is no clarity whether VAT is to paid on service tax or the other way round," said a spokesperson of a leading distribution firm.

When contacted Microsoft, a spokesperson said: "The government has made its policy clear that it intends to subject all software to either service tax or excise duty. Certain aspects of the new service tax provisions are not very  clear with respect to their application to software products. We intend to work with industry organisations towards  getting a clarification from the government. Regarding impact on our distribution channel, service tax paid by both service and manufacturing sectors is generally available as an input credit, so cascading impact of the new levy should be limited."