Hit by imposition of service tax, the IT industry has asked the government to come out with a clear classification of packaged software explaining if this item should be listed under goods or services. Lack of clarity and imposition of service tax on packaged software could lead to increased litigation in the sector, industry experts said.

There is a question on sustainability of the levy on information technology services, said Atul Gupta, senior director, Deloite India.

Microsoft India tax director Ashwini Sachdeva said for the last 8-10 weeks, the software business has been paralysed because of the ambiguity created by the notification.

Confusion arises as the notification does not make a clear demarcation if software will be sold as a good and hence liable for sales tax (VAT) or considered as services bringing it under service tax. The ambiguity is likely to affect the business of companies like Microsoft and Adobe in the way they sell their packaged software. Levy of tax on this item will become effective from May 16, 2008.

The government has made it 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.