The Budget has briefly touched upon the constitutional
issue of defining goods and services. By imposing
service tax on customised software, the FM made it
unambiguous that customisation of software is a service,
rather than customised software, goods.
This
view of the centre is expected to have a persuasive
value for states like
Karnataka which treat sale of all kinds of
software—packaged (off-the-shelf), as well as partly
or fully customised— as sale of any other goods and
charge Vat.
Indeed, the Budget interpretation is not binding on
states as they have full constitutional freedom to
charge tax on sale of what they call goods.
The Supreme Court had earlier said software—packaged
and marketable—are goods. The court however did not
comment on customised software in this context. And a
lot of litigation followed.
By the way, the Budget decision to bring customised
software on par with packaged software (which will now
attract 12% excise duty) by the new service tax has come
as a windfall for export-oriented IT firms like Infosys,
TCS and Wipro.
These firms mostly develop customised software for
clients abroad and operate the transactions through
service contracts.
The contracts are for development of the customised
service. Since the activity was not taxable, most of
their exports were deprived of input tax credit (ITC).
In other words, the principle of zero-rating or total
tax neutralisation of exports could not be extended to
the export of customised software, the prime
revenue-generating activity of Indian IT firms, because
they were not exporting a taxable output.
Now, with the output being taxable, they will be
eligible for full ITC. These firms were not getting
credit for the tax content in inputs—renting and lease
circuit services, for instance. According to PwC’s
indirect tax leader S Madhavan,“this is a huge benefit
for IT firms.”
What about the likes of Indian arms of SAP, Oracle,
Ericsson, Siemens, Nokia etc, who import systems of
software from parents overseas and offer them for Indian
clients with a lot of customisation?
Or telecom companies who use imported services for
offering customised service? Before the Budget, their
service tax liability was only to the extent of the
services part of the contract. They could show the goods
part separately.
Since there is no Vat on imports (even the
countervailing duty does not apply if you download
inputs electronically), the goods part of the contract
was virtually tax-free.
Now, the entire transaction would be deemed as import of
(taxable) services, and when these are used as inputs
for value added services/goods, one can get the credit
for the input taxes paid. Of course, the output tax will
be passed on.
“At the centre of the centre-state debate on defining
goods and services could be that if the buyer has no
control on the process of creating customised goods, it
is a sale contract, and if the buyer continuously
controls the process of creation, then it is labour
contract, says Satya Poddar of Ernst & Young.
In the case of highly customised services, the dividing
line got blurred and the Budget has now made an attempt
to make it clear.
Service tax is the ‘tax of the future’ with bulk of
its (growing) potential yet to be tapped. With budget
estimate of Rs 64,460 crore, service tax is to
constitute 7% of the gross receipts of the centre in
2008-09. It is presumed that revenue from this tax will
touch a staggering Rs 8 lakh crore by 2020.
Says former member of the central board of excise &
customs A K Raha, The GST system would need an overhaul
of the system of service tax levy and collection.
First thing is to give states the power to tax services.
There are a host of policy and administrative issues to
be resolved in case of rendering of taxable services in
the states’ list from one state to another.
Sour
ce
: Economic Times - Gurgaon, Haryana, India, dated
05/03/2008
