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Tax issue takes a twist as decide to charge service tax
September, 01st 2009

Even as the software reseller community is grappling with the dual taxation issue and trying to achieve a clarity on whether to charge only VAT or both service tax and VAT on packaged software, national distributors including Redington and Ingram Micro have resolved to charge service tax on retail software (ie software available as a box item) with effect from September 1, 2009.

Currently the boxes attracts only VAT, but now an additional service tax will be charged on the purchase of all retail boxes of Symantec, Adobe, Microsoft, McAfee and Trend Micro. The DQ Week has a copy of the mail that Redington has shared with the dealers stating the same.

In view of no clarity on tax structure from the government and with confusion mounting, both Ingram Micro and Redington had refrained from doing any Microsoft business for the past one and a half month. However, having taken the above decision, both the distributors will now resume their billing and hence software business with the vendors and channel.

Both the distributors have arrived at the above decision after due consultation with their respective legal departments and tax authorities.

Pointing towards the implications of the distributor's decision Alok Gupta, CEO Softmart Solutions added, "We are shocked to receive this notification from the distributors. If the decision is implemented, the number of partners selling software will fall by 80 percent.

Currently not even 10-20 percent of dealers dealing in retail software have service tax numbers, so it will definitely worsen the issue.

We are not reflecting this change in our price list as we don't want to create an uproar in the industry. We need to get into active negotiation mode with the government and establish a dialogue process with distributors to find a solution to this problem."

Harinder Salwan, Secretary, Infotech Software Dealers Association (ISODA) stated, "We will not going to sell any software boxes until the distributors share their retail price list with us.

This decision by the distributors essentially mean that we will now have triple taxation to deal with since we will now have to take CVD, service tax and VAT into account before calculating the price we eventually offer to our customers. If the retail prices being shared by the distributors are going to be higher than we have expected then we will evaluate our decision and seek a solution from them."

Reacting on the decision by the disti's PN Prasad , President Confed ITA ,"Both Ingram Micro and Redington have informed us of their decision to charge service tax on all retail software beginning from September 1.

This means that the distributors will now send the software invoice after charging service tax on the sale of software, to the software dealers. Further as a receiver of service, the software dealers will have to deduct TDS as part of 'Service' payments.

Again a dealer's customer will deduct TDS on his/her billing (at 10-11 percent) of the invoice value. I have hence resolved not to indulge into any transaction until we are exempted from service tax and have also notified the members of Confed-ITA of my decision."

Prasad further clarified that the move by the national disti's will worsen the situation of the software resellers, since getting TDS deduction exemption from Income Tax department on a case to case basis is a tedious process.

According to Prasad, the above decision will leave the software resellers with no option but to hike the price of the software keeping their margins and TDS amount to be deducted, in mind.

"The government is not encouraging the software resellers and in a way is directly encouraging piracy. The distributor, regional distributor, software reseller and further the customer are all going to deduct their TDS which will only add to the cost of the software and benefit government.

As a dealer we cannot invest huge amounts in purchasing software since we deal in bulk of software. We are only selling or trading the software and not adding any value to it hence charging service tax on the software does not make sense. Until the dual taxation came into picture we used to enjoy decent margins however, post the finance bill introduced by the government, software business is no longer an attractive affair."

Citing the case of BSNL and other service providers in Chennai, Prasad pointed that these service providers pay service tax at the source and all subsequent distribution is then considered as trading, which attracts only VAT (Value Added Tax).

"We can follow the same concept in case of software. Hence the vendor can pay the service tax at the source and we can treat the product (software) sale as trading only and hence pay only VAT," opined Prasad.

Explaining their decision Krishnan Jaishankar, MD, Ingram Micro stated, "We have arrived at the above decision after due consultation with our tax department and consultants. TDS will impact cash flows of companies and each organization will need to find the best way to deal with this."

On the other hand PS Neogi, Director, Redington said, "We would not like to comment on the specifics of the duties and taxes applicable for various types of software products since the issue still remains very complicated.

However, we would confirm that all our decisions have been arrived at after carefully analyzing the impact of all relevant statutory communications and consulting the taxation and legal authorities. The modus-operandi, then gets communicated to our partners."

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