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customs, excise, service tax and value added tax. What
has resulted is a maze of positions, some consistent
across the industry, while some linked to appetite for
litigation. One of the expectations of a single levy one
tax model of Goods and Service Tax (GST) is a resolution
of the levy related questions. Unified taxing
legislation would at once mean that the complexities of
different taxes applying at different points and under
varying definitions should get eliminated. GST is
expected to result in a combined tax of central GST and
state GST on the same base value. A consequential
benefit (which is not only for the software industry)
would be cross credits of indirect taxes (excise/service
tax and value added tax) across the chain an aspect that
is one of the significant limitations of the present
framework. CST would no longer be a cost. Another aspect
of software that has been a matter of significant debate
is the distinction between customised software and
off-the-shelf software which leads to the question as to
whether software involved in the transaction is goods or
services . Again, a combined levy on goods and services
would not be required to address this question all
software would get covered. If we take a closer look at
every aspect in the value chain of software, first would
be imports into India. Given that basic customs duty is
exempt, any GST paid on the software is expected to be
fully creditable, thereby eliminating any tax cost. The
exemptions from customs duty for value of software
relating to transfer of right to commercially exploit
would no longer be relevant. The debate on whether
octroi (tax on importation into a local area for
consumption, use or sale) would merge with GST is still
on; if it does, even non-creditable taxes like octroi
would no longer be tax-costs. As regards manufacture in
India, if the entire concept of excise is replaced by
tax on supply , no taxes would be payable only by reason
of duplication or recording, etc, as tax would apply
only when such recorded software is supplied . This is
likely to shift the point of levy and collection of tax
on value added at the manufacturing stage. Therefore,
there should be no difference if a software license is
imported into India for commercial exploitation (as an
IPR) or for distribution (as a copyrighted article for
onward sale). On the distribution side, the same GST
should apply across all types of supplies whether of
imported software on a media or electronic imports, or
import-duplicate-sell model, or software created in
India and then sold as a licensed product etc. Thus,
there would be parity on the implications on output
taxes irrespective of the mode in which the software
reached the stage where tax is applied. But given that
we would have to deal with a dual GST, there would be a
continuing need to pay taxes in different states
depending on where the sales are made from or sales are
made to. It is currently unclear how this model will
work especially in relation to interstate transactions.
For software services in the nature of advisory,
designing and developing, testing etc, one immediate
impact could be an increased tax rate currently service
tax applies at 10.3%, which may move to the median GST
rate expected to be 16-18%. Thus, all continuing
contracts which are inclusive of taxes, margins may take
a hit, unless there is a well worded change in tax/ law
clause. Besides, it is widely expected that GST would
have place of supply rules as a part of the framework.
These rules would predicate where are particular type of
service is provided or deemed to be provided. This
determination would be critical to conclude the state in
which taxes would be payable. Currently, service tax
being a central levy and tax payers having an option to
operate under a centralised registration, the
distribution chain for a service provider is reasonably
easy to manage from an indirect tax perspective (as
compared to a manufacturer selling in different states).
For some services, it could result in the tax payer
requiring to register any pay taxes in multiple states
an increased burden of compliances. It is suggested that
the legislations across states would be similar and so
would be the routine compliance requirements. This may
help reduce the complexity of multi-state compliances.
Overall, whatever be the bases of taxation and the
points of collection be, it is expected that all taxes
would be a pass through for business-to-business
transactions, and taxes would apply only when software
is acquired by an end customer. This would be a
significant leg-up for the software industry which is
fraught with multiple and partially non-creditable tax
levies. Rajeev Dimri is Partner, BMR Advisors. The views
are personal. Divyesh Lapsiwala, director, contributed
to the article.
Source :
http://in.biz.yahoo.com/091101/50/bauh2l.html,
dated
02/11/2009
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