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[This article appeared in “Service Tax Today” Volume 13 Part 8 Page No. 169 dt. 25-4-2008]


Extension of Service Tax to Information Technology Sector – Poaching other Areas-I

by CA. Pradip R Shah


1.0   End of Adolescent Days

As it happens in the life of every human being, birth of a child brings joy and happiness. The child gets most coveted attention and, at times, being pampered as well. With the process of time, the child becomes an adult and the approach of the family member’s changes. The child is expected to be mature enough to stand on its own without the help of anybody. This is the natural process as we have been witnessing in various forms of life like animals, birds etc. as well. Looking to the approach of the Government to software sector in the last five years, it appears that the Society is sending messages to the IT Sector to live on its own and not to depend on doles rolled out in the form of taxation relief. As we have been observing in the last five years, sun-set clauses are being introduced with reference to various deductions / exemptions. Within a short span of time, most of the exclusive benefits will stand discontinued. Although some of the aspects of IT sector were brought within the purview of ST earlier, a major portion i.e. development and other ancillary activities were outside its scope. With the proposed amendments that also will come to an end.


2.0   The proposal

Budget 2008 proposes to bring major changes in the taxation of IT services. In the process of bringing in the net various aspects of IT sector, as we shall see hereinafter, it also encroaches into other ancillary areas as well. To what extent it is justified or advisable is a matter to be debated. The Budget approaches the problem of taxation of IT sector in two ways viz. defining the ITS and bringing it within the tax net, although not fully but partially.


In the first place it is proposed to insert clause 53 defining the term “ITS”. These 52 words are wide enough to cover not only IT sector as we know in our day-to-day life but other areas as well.


In the second step, clause 65(105)(zzzze) is proposed to be inserted bringing various aspects of ITS within the tax net. It should be kept in mind that it is not the entire gamut of IT sector is within the tax net. Provisions of clause (zzzze) have restricted application viz. to business / commercial application only.


The third major change is with respect to amending various other services which also plays a major role. They are Management, Maintenance or Repair Service, Consulting Engineering Service, Technical Testing and Analysis and Technical Inspection and Certification.


With these insertions and amendments, taxation of IT Sector will come to a full circle bringing an end to exclusive treatment. Taxation of ITS is to be seen from three perspectives viz. Definition of ITS, charging section and overlapping / multiplicity of taxes. S. 65 (53a) defines the term ITS in the widest manner. However, S. 65(105)(zzzze) keeps its taxability restricted. Unfortunately, S. 65(105)(zzzze) has been drafted in such a manner that it encroaches in the area of VAT which is the exclusive are of taxation of the States only. In fact, there are chances of duplication levying both the taxes i.e. State VAT and Service tax as well on the same transaction. An attempt has been made here to analyse S. 65(53a) defining ITS.


3.0   Definition

Proposed insertion of the definition of ITS reads as follow:


‘(53a) “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;’;


For better understanding it can be represented in a tabular format as follow:


Representation of





Source code


Object code

Recorded in a machine readable form

capable of being manipulated


Providing interactivity to a user

Means of a computer


Automatic data processing machine


Any other device





Let us look at salient features of the above definition.

a)    It is silent about storage media, or medium of transfer. There is no specific reference to the media on which ITS has been stored or recorded. Secondly, there is no reference to how the ITS is being rendered.

b)    It includes both system and application programmes.

c)    It also includes subdivisions such as assemblers, compilers, routines, generators and utilities.

d)    It covers database of any type.

e)    Representation of sound i.e. recording of music is covered.

f)     Representation of image i.e. picture or video or film shooting is covered as well.


Thus, applicability of ITS is not restricted to the programmes or software used in computers in our day-to-day life but it extends to the areas where the technology of representing instructions electronically is also applied. Whether the areas not connected with computer or software industries will attract ST is another issue to be seen in the context of the provisions of S. 65(105)(zzzze). 


4.0   What is it?

Computer software has no specific definition. It is generally referred to as the predetermined set of instructions or programs that the computer carries out. Software, which is inherently intangible, is physically manifested by electronic pulses arranged on a magnetic disk or magnetic tape or on a computer chip. There are three main varieties of software: (1) operating systems, (2) application programs, and (3) data files.


i)       Operating Systems: Operating systems are programs that actually instruct the computer on how to operate.


ii)      Application Programs: Application programs are the instructions which are actually manipulated by the computer and tell it how to perform various tasks. These include the word processing as well as the Lotus and Excel spreadsheet, Power Point type software.


iii)     Data Files: Data files are not instructions but are compilations of certain facts.


The title of the definition “Information Technology Services” as proposed in the Budget 2008 would lead one to believe that the tax will be levied on the services rendered for transferring information through technology and its related aspect. However, it goes much beyond and covers sound recording and shooting / imaging as well. Therefore, as we shall see, apart from software industry, the definition will be applicable to film industry, medical services etc. as well.


4.1   Any representation

The definition covers the process of representation. Representation means presentation  in the predefined form. Activity carried while rendering services under ITS should generate the output in the form of presentation in a predefined format. As per the definition this presentation can be of anything viz. instructions / data / sound or image.


4.2   Instructions

In computer science “instructions” means a line of code written as part of a computer program. Accordingly, representation of instructions” means sequence of automatic data processing equipment instructions necessary to solve a problem.


4.3   Data

It means “a collection of facts from which conclusions may be drawn”. At first sight treating data as ITS may not gel well with set of instructions to communicate with the computers. Data may be raw or the processed one. Looking to the definition, mere act of entering the data on a media and supplying to other person without processing in any respect will also get covered here. One can appreciate processed data as outcome of ITS. However, the definition does not look at the final outcome of the process only but goes back to the early stages of processing or development activities.


4.4   Sound

It means a particular auditory effect produced by a given cause. It is the subjective sensation of hearing something. Technically speaking it is the audible part of a transmitted signal. Representation of sound in a machine readable form appears to overlap the sound recording services which has been defined u/s 65(98) known as “Sound Recording Service”. It covers recording of sound on magnetic media in any manner i.e. cataloguing, mixing, remixing etc. The types of sound generally which are recorded are songs, speeches, drama, film or other dialogues, discourses, educational lectures etc. Therefore, inclusion of representation of sound under ITS will not pose any problem as they are already covered. However, a problem may arise with respect to reproduction of original master to make further copies of the audio tape or CDs etc. CBEC circular no. B11/1/01/-TRU dt. 9th July, 2001 exempts the same. However, no reasoning has been assigned for the same. But it appears that services covered u/s 65(98) are much broader as, apart from recording the sound on media it also covers other services provided by viz. studio, technical persons, musical instruments, providing different kind of sound from library etc. As such, inclusion of representation of sound is limited in its applicability. But the moot point that will arise now is to what extent exclusion granted to reproduction of original master to make further copies of the audio tape or CDs. Will it not get covered under the definition of ITS?


4.5   Image

Image is a visual representation of an object or scene or person or abstraction produced on a surface. Image is a picture of a person or an object. It can be an image of a part of the human body as well. If it is so, does it mean that it will cover x-ray photo services provided by radiologists? Will it also cover Sonography, angiography or Magnetic Resonance Imaging (MRI), Endoscopy? Let us examine each of them in detail and see it gets covered as ITS.


4.6   X-ray Photo:

It is production of electromagnetic radiation of short wavelength when high-speed electrons strike a solid target. It captures the image of bones and reproduces on film. As long as the image is recorded on a film ITS definition will not apply as it is not recorded in a machine readable form nor it is capable of being manipulated. However, the same service when recorded on a CD or floppy with the advanced machines known as “Digital X-Ray” will get covered. This is for the reason that image captured on a CD or a floppy is capable of being manipulated by a doctor by rotating it or enlarging etc.


4.7   Angiography:

Angiography is roentgenographic examination of blood vessels after injection of a radiopaque contrast medium producing an angiogram. Cardiac problems have become common and with the facilities being made available in almost all the cities, angiography is being used widely for capturing the image of artery, veins and the heart. As in the case of digital x-ray, image of blood vessel recorded on a CD or any media is being capable of manipulated by the doctor in the sense that it can be rotated or enlarged.


4.8   Sonography:

It is the technology using the reflections of high-frequency sound waves to construct an image of a body organ (a sonogram). It is commonly used to observe foetal growth or study bodily organs. Images created with the help of high-frequency sound is recorded in machine readable form on a CD or other media. It is being capable of being manipulated by a doctor in the sense that it can be enlarged or rotated.


4.9   Magnetic Resonance Imaging (MRI):

MRI technology makes use of nuclear magnetic resonance of protons to produce proton density images. It creates the image of cells of a minute nature in a human body. Images are recorded in a machine readable form. As in all other cases as referred to above it can be manipulated by the doctor by enlarging a part of the image or rotating it.


4.10 With the advancement in technology various types of machines are being used in medical science for capturing image of human body. All of these machines are capable of manipulating in following ways.


a)    Image processing features like W/L, Brightness & Contrast, Zoom, Pan, Flip, Reverse, Crop etc.

b)    Annotations like arrow, text markers, lines, circles can be done on imagines

c)    Linear, Angular measurements and area calculations

d)    Simultaneous processing of all images by mouse

e)    Image sharpening filter

f)     Image enhancements filters for increasing the quality of images

g)    Viewing matrices

h)    Angular rotation

i)     Rectangular, Elliptical or freehand image cropping

j)     Picture-in-Picture

k)    Magnifying Glass

l)     Image stitching

m)  Facility to place image anywhere in the report


The definition of ITS, cover all of the above. Whether the same are subject to tax or not is another issue to be examined in the context of the provisions of S. 65(105) (zzzze).


5.0   Format of Representation

The definition covers representations of instructions etc. in two formats viz. source code and object code. Representing instructions in source code is the most primary one.  However, with the technological development and commercialization of software other efficient method has also been developed known as object code. No definition has been provided for the term “object code” but it refers to the machine-language output of a compiler that is ready for execution on a particular computer.  Under this format source code is converted into machine readable instructions through compilers and linkers. It should be noted that the applicability of the definition is not restricted to instructions recorded in source or object code only. Use of the word “including” implies that it should be in a machine readable form and reference to source and object code is to expand its applicability only. Therefore, representation of instructions in the form other than source or object code is also covered.


6.0   Typical Characteristics

The object i.e.  text / data / graphics / image should be in a machine readable form. A format not compatible with any machine cannot be included. However, readability by a machine expects existence of media. The definition is silent about the media in which such instructions etc. are stored. It means it can be on any media including print. However, it should be in a machine readable form. A question will arise whether instructions etc. delivered on paper will be covered under the said definition. This is for the reason that machine cannot read it directly. Before it can be made to machine readable format, the instructions on print media etc. has to be scanned and process through a text / picture / image recognizable software. It is only there after it will become fit for being manipulated.


Second condition is that instructions etc. should be capable of being manipulated. To “manipulate” means control (others or oneself) or influence skillfully, usually to one's advantage. The definition is silent about the level of manipulation. Should the instructions etc. be capable of being manipulated fully? For example, a video film containing image of blockade in the vein can be viewed on any computer. However, the user is not permitted to manipulate it in the sense that he can edit any part thereof. At the most, the user can enlarge or rotate a certain portion only. Will this limitation take it out from the definition of ITS?


7.0   Interactivity

Another important requirement is with regard to interactivity. “Interactivity” means capable of acting on or influencing each other. It means that the user should be in a position to act on it. Not only that, the object should also influence the user. It is this typical characteristic aspect of the software i.e. intelligence incorporated in the instructions which adds value to it.  


It is not necessary that all the software should interact with the user. However, the user will be in a position to manipulate it. Therefore, absence of the feature relating to interactivity should not exclude it entirely form the definition.


8.0   How to make use of it?

The last limb of the definition imposes a condition that the representation of instructions / image / sound etc. should be capable of being exploited by means of a computer, an automatic data processing machine, any other device or equipment. Although the definition is silent about the media on which the instructions etc. are recorded / stored, it should have the capability of being exploited by a machine. This leads to interesting issue. If a doctor carries out angiography of a patient and gives his report on a paper then it will not get covered under ITS. However, if the doctor delivers the recording of image of blood vessels on a CD then it will be covered under ITS.


9.0   Conclusion:

Having been treated softly for a long period of time, levying ST will complete the full circle of putting the IT Industry like any other. With the exemptions / deductions under Income tax coming to an end, with the extension of the coverage in the arena of ST, IT Sector will also start feeling the pinch. However, what is surprising is that, in the process, the areas which were hitherto not associated with IT Sector but were becoming heavily dependent on application of IT products will also be brought within the ST net.

(To be continued)

Category Service Tax, Other Articles by - CA Pradip Shah