Service Tax On Software

The Finance Act, 2008 has imposed service tax on the services relating to information technology software. The statutory definition of information technology is given in section 65(53a) of the said act which reads as under:-

Information technology software means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment.

The statutory definition is a specific one in view of the use of the term means. However, the term software has not been specifically defined in the act. In view of that, the service providers has to search for what is software elsewhere. The Supreme Court decision reported in (2007) 215 ELT 484 helps to resolve the issue to a certain extent. They say that the two main types of software are systems software, which controls the workings of the computer, and application software, such as word processing programs, spread sheets and data bases, which perform the task for which people use computers. Two additional categories, which are neither system nor application software but contain elements of both, are network software, which enables groups of computers to communicate, and language software, which provide programmers with the tools they need to write the program. In addition to these task based categories, several types of software are described, based on their method of distribution. They include packaged software, freeware and public domain software, which are distributed free of charge , share software and vapourware software.

Having classified the software as above, now readers may seek the definition of taxable service which is given in section 65(105)(zzzze) of the said act. The definition therein is any service provided or to be provided to any person, by any other person in relation to information technology software including

1. development of information technology software,

   
   

2. study, analysis, design and programming of information technology software,

   
   

3. adaptation, upgradation, enhancement, implementation and other similar services related to information technology software,

   
   

4. providing advise, consultancy and assistance on matters related to information technology software, including conduction feasibility studies on implementation of a system, specifications for a database design, guidance and assistance during the startup phase of a new system, specifications to secure a database, advice on proprietary information technology software,

   
   

5. providing the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of an inclusion in other information technology software products,

   
   

6. providing the right to use information technology software supplied electronically.

   
   

From the preamble of the definition given herein above, the Finance Act, 2010 has taken away the then words for the use in the course ,or furtherance, of business or commerce with effect from July 1,2010 and hence service tax levy shall be confined to information technology services provided for any purpose what so ever, meaning thereby all aspects of the service have been comprehensively covered under taxable service.

The next issue emerges is regarding valuation of taxable services. The value of taxable service is required to be computed as per section 67 read along with service tax (determination of value) rules, 2006. It must be particularly noted that, under the above referred valuation rules

1. all expenses or costs incurred by the service provider, including reimbursement of expenses, shall be included in the value, except those incurred as a pure agent which satisfy the requirements prescribed in rule 5(2) of the said rules.

   
   

2. the value shall, in all situations, be determined by the service provider himself, and such value should not be less than the cost of provision of the services; and

   
   

3. the department has reserved the rights to verify the records of the service provider, where there are adequate reasons warranting verification of the value adopted by the service provider.

   
   

Like all other services, here also, the service provider is eligible for full exemption from service tax to the following services / receipts :-

1. services provided to the united nations or an International organization declared by the Central government,

   
   

2. services provided to a developer of SEZ or to a unit of SEZ .However, with effect from March 3, 2009 the exemption is available by way of refund of service tax.

   
   

3. services provided for the official use of a foreign diplomatic mission or consular post in India.

   
   

4. value of materials sold by the service provider to the recipient of service during the course of providing any taxable service, provided that no cenvat credit has been taken on such goods and materials ,or, if taken, such credit is paid before effecting the sale.

   
   

The service provider is also allowed to enjoy the threshold limit of Rs. 10 lakhs fixed by the notification 8/2008 dated March 1,2008. The liability to pay service tax rests upon the service provider if he is located in India irrespective of whether or not he has collected the service tax from the service receiver. On the other hand, if the service provider is located out side India and the service receiver is located in India, then the service receiver is treated as the service provider and he is the person liable for paying the service tax under rule 2(1) (d) (iv). But the taxable services provided from outside India and received in India shall not be treated as output services , as per rule 4 of the Taxation of services (provided from Outside India and Received in India) Rules,2006, for the purpose of availing of credit of duty of excise paid on any input or service tax paid on any input services under the Cenvat Credit Rules,2004. However, service tax paid on import of service shall be available as credit against payment of service tax on other services vide CBSE letter DOF N0.334/1/2008-TRU dated June 29,2008

With 126 services, 10 set of rules, a plethora of notifications ( tru and other than tru) and a heap of circulars / instructions, compliance of service tax provisions has become ,day by day, a difficult task .Unless the Government simplify the entire procedure of service tax, fastening the liability of service tax will be nightmare to the citizens of India.