Monday November 2, 03:22 AM

Source: Indian Express Finance

Software taxation needs to be simpler in GST

By Rajeev Dimri
One of the hotly debated topics in the indirect tax space is how to tax software. The levy of taxes is intricately linked to the nature of the software and the media on which it is provided. Currently, one has to analyse implications under four different levies to assess tax consequences on software: 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