Service Tax / Vat on sale of softwares.

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ANAND SHEIK (Querist)
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21 April 2009 After the incorporation of ITSS under Service Tax Act , the dealers in softwares are charging both VAT and Service tax on sale of softwares and Licenses. Further in some states there is Vat even on sale of customized softwares. If VAT is already there on sale of softwares ( branded/ customized ) then how there can be service tax on sale of branded and customized softwares ?

Please clarify.

Furher is there any case pending before any of the high courts in India on validity of charging service tax on sale of Softwares(branded/ customized).

Dayal

Dayal (Expert)
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21 April 2009 Actually w.e.f. F.Y. 2008-09 service tax is made applicable on the customized software including the license part of the customized software.Additionally VAT/CST is also applicable on the license part of the customized software. So there is a dual tax in the form of VAT/CST and Service Tax on the license part of the customized software. All Companies including Oracle,microsoft etc are charging both VAT and Service tax on the license part of their software.

“Information Technology Software” Services are brought into Service Tax net with effect from 16 May 2008. The taxable service definition covers service provided to any person, by any other person in relation to information technology software for use in the course, or furtherance, of business or commerce, including

1.Development of information technology software, study, analysis, design and programming of information technology software;

2.Acquiring the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software;

3.Acquiring the right to use information technology software supplied electronically;

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ANAND SHEIK

ANAND SHEIK (Querist)
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22 April 2009 thanks for the info.

but still not fully satisfied .

Still request experts to please solve the query.

Asha Kanta Sharma online

Asha Kanta Sharma online

(Expert)
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25 July 2025 Got it! Here’s a clear explanation about **Service Tax and VAT on software sales** based on your query and common practice:

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### 1. **Service Tax on Software**

* Since **16 May 2008**, customized software development and licensing falls under **Information Technology Software Services** and is **liable to service tax**.
* This includes:

* Software development, design, programming.
* License or right to use software (including electronic delivery).
* The service tax is on the **service portion**, i.e., providing the right to use or customized development services.
* For packaged (branded) software, the service tax applies only to the **license or service part** if it’s a customized software or software service.

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### 2. **VAT on Software**

* VAT (or CST) is charged on **sale of goods**.
* Packaged software in **physical media** (CDs/DVDs) is treated as **goods**; VAT is charged on the sale price.
* Customized software often involves supply of goods (if delivered physically) or transfer of license.
* Some states levy VAT on sale of **customized software** as goods or works contract.
* Hence, VAT is charged on **sale of software as goods** (physical copies or licensed software treated as goods).

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### 3. **Dual Taxation (VAT + Service Tax)**

* This causes a **dual tax burden** on the license or software part:

* VAT on the sale of software as goods.
* Service tax on software services (customization, licensing rights).
* This is a known issue in the industry, especially for customized software.
* Large software vendors (Oracle, Microsoft, etc.) typically charge both VAT and service tax accordingly.

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### 4. **Legal Status / Litigation**

* There have been cases challenging the levy of service tax on software licenses, but generally the department treats software services and software sales separately.
* Courts have given different rulings in different states, so this issue is somewhat unsettled but accepted as of now.

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### **Summary:**

| Software Type | VAT Applicability | Service Tax Applicability |
| ---------------------------------- | ---------------------------- | ------------------------------------------------------- |
| Packaged software (physical media) | VAT applicable | Usually no service tax (unless customized) |
| Customized software & license | VAT applicable (some states) | Service tax applicable on customization, license rights |

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If you want, I can help you draft a note on how to handle invoice billing or compliance based on this dual tax?

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