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Tax disputes likely over value
August, 04th 2009

Even as the Budget provided a major relief to the software industry by exempting it from excise duty on the transfer of rights to use software, the lack of guidelines on how to calculate the value of transfer of rights is likely to add to the innumerous tax disputes pending with the government. According to finance ministry officials, the transfer of right portion in the total cost will be based on self-declaration by the merchant. The Central Board of Excise and Customs (CBEC) would then cross examine whether it matches their estimates, leaving much scope for subjectivity and contention.

CBEC, the principal body on excise and customs, has ruled out the likelihood of issuing standard norms that should serve as guidelines to calibrate the value of transfer of right in case of a packaged software. A notification exempting the transfer of right from excise duty has, however, been issued.

We do not plan to issue any guidelines. Software companies will have to declare the value of transfer of rights to use themselves. Based on their declaration, we will exempt them from excise duty, a senior finance ministry official told The Indian Express.

While the notification gives relief to the industry, many issues remain unresolved including the manner in which it needs to be implemented, said Pratik Jain, executive director, KPMG. The reason for this is that in the case of Tata Consultancy Services, the court had held that standardised software is a good. Going by this logic, there should not be any service tax on any component of the value of the software, he added.

Service Tax was introduced on select software transactions in Budget 2008-09. This included right to use IT software and transactions related to packaged software. Packaged software was, therefore, treated as goods and hence liable to excise duty or customs duty in case of imports and VAT thus resulting in a multiplicity of taxes.

In order to remove this anomaly, the government this year has exempted the industry from paying excise duty on transfer of right to use software. The change will ensure that packaged software is not subject to both excise duty or customs duty and service tax.

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