By Dhaval Valia
A recent amendment to the Finance Bill clearly classifies software license as a service and hence will levy Service Tax (ST) on the license value of packaged software from September 1, 2009. Devesh Aggarwal, President, Infotech Software Dealers Association (ISODA) talks about the ramifications of this on software resellers.
What is ISODA’s interpretation of the recent amendment in the Finance Bill?
The amendment in the new Finance Bill makes the stand of the government very clear. It wants to treat the sale of packaged software as service transaction to bring it under ST net.
The sale of software as per the end-user license agreement is the grant of use of license from the vendor to the end-user. However, the government is treating the grant-of-use as transfer of right-to-use the software, thus making software licenses liable for ST.
So far, distributors have imported packaged software as goods and paid CVD. But as per the new Bill, the distributors will have to declare separately the value of media (CD) on which the packaged software is imported, and the value of the license. While CVD has to be paid on the value of media, ST has to be paid on the license value of the import.
What is distributors take on it?
Distributors had earlier intimated us that they would be charging CVD, ST and VAT on all invoices, without passing the CVD credit to partners. This was rejected by channels as it would have meant 8 percent increase in the software license cost.
We have recommended that distributors pay CVD on the packaged software at the time of import—like they were till August 31, 2008—and also pay ST on the same.
By doing so, the distributors can pass the credit of CVD in the ST component, which is permissible under the law. However, distributors have not responded to our proposal nor have they proposed a better solution.
How will the amendment impact the software pricing?
If we had accepted the distributors’ proposal, the net impact would have been 10.3 percent increase in the price of the software products. But if the CVD credit is passed as per ISODA’s recommendation, then the net impact will only be 2.3 percent.
ISODA has alleged a cartelization among distributors. Could you substantiate the allegation?
ISODA believes that distributors have cartelized amongst themselves and have created a monopolistic trade practice. ISODA has been voicing the concerns of the channel community to distributors and has asked for transparent dealings. Unfortunately, distributors are acting like big daddies and dictating policies that are detrimental to the channel business.
What initiatives has ISODA taken to redress the taxation issues of the software resellers?
Since inception, ISODA has been actively interacting with government officials. We have approached vendors like Microsoft, Adobe and Symantec, as well as distributors to work jointly on the issue. We have contacted ST Commissioners in all major cities and sought clarifications on the notification. In the past, High Courts and the Supreme Court have unambiguously categorized packaged software as a good and not service.
We have also aligned our activities with associations like Nasscom, Ficci and Mait to represent our issues at the highest level. Unfortunately, our efforts and initiatives haven’t been successful so far.
If double taxation is not legal, why haven’t you challenged the VAT and ST authorities on the issue?
After lobbying unsuccessfully for several months, we were forced to file a petition in Chennai High court challenging the levy of service tax on packaged/canned software as they were previously declared as goods with VAT charges applicable. As per the Service Tax Act, service tax can only be charged on service.
ISODA members are the most influential software partners and yet the association hasn’t been able to drive home its agenda?
We have approached more than 20 major international software vendors asking for clarification. Unfortunately, these vendors do not have a legal entity in India. And their distributors are a disinterested lot.
What is the business loss ISODA members have suffered due to the taxation mess?
Over the last 12 months, we estimate the loss of business among our members at roughly 30 percent. This is excluding the rise in interest costs due to blocking of working capital on account of TDS of 11.33 percent.
What is the support you expect from vendors?
Vendors need to force distributors to join hands with us so that we can fight the battle. They do need us as much as they need the distributors. Moreover the vendors need to extend additional credit to the channel to tackle the issue of TDS. |