The government plans to remove either the service tax or the countervailing duty on packaged software such as Microsoft Office to offer some relief to over 4,000 software retailers whose business has been rendered unviable by multiple taxes in a slowing economy.

The Central Board of Excise and Customs (CBEC), the apex body for indirect taxes, has proposed to end double taxation on software sales and is likely to come up with a clarification soon, said a senior government official. A final decision would be taken shortly, he said requesting anonymity.

The domestic market for software market in the country is estimated at around Rs 10,000 crore, but the margins are in the range of 4-5%.

When a packaged software is downloaded, it attracts service tax at the rate of 10%, as the downloading is treated as a service. It again faces countervailing duty of 8%, when a hard copy is taken or the licence is taken. The countervailing duty is levied on imported goods to provide a level-playing field to Indian companies that pay an excise duty.

The government is examining both the options exemption from service tax and from countervailing duty. This comes after an appeal from the software industry to CBEC, following a 40% decline in sales.

The problem arose after the Union Budget 2008-09 brought customised software under the service tax net. But, the finance act did not mention the word customised, giving room to tax officials to interpret the law.

The definition prescribed for software makes acquisition of right to use packaged software also taxable, thereby leading to double taxation.

This is because sale of licences, which are acquisition of a right to use the software, would be treated as a sale of good and thereby attract CVD and Value Added Tax.