Service Tax : Covered in Ambiguity

In the Union Budget announcement this year, it was
notified that prepackaged software boxes will be exempted from levying service
tax which is currently at 10%. While this long pending step by the government
has been welcomed by most software resellers, many have also said that the
wording in the notification is quite vague and have therefore sought for
clarification on the same from the concerned authorities.

According to Dhiren Mehta of Goa based Magnamious Systems
this will encourage the sale of legal software. "With reduction in price, people
would opt to buy more from the legal route rather than purchasing pirated
copies," says Mehta. "There is no doubt that this is a positive step by the
government which will definitely benefit retailers of packaged software.
Typically retailers work on wafer thin margins, so a 10% service tax exemption
makes a major difference to their cash flows," says Rajeev Phadtere, CEO of Pune
based C-Dot Systems. Paresh Shah of PH Teknow says, "It is a good move to exempt
service tax and this will ensure that working capital of retailers does not get
blocked in this indirect tax." Mumbai based Tricom Internationals Harinder
Salwan agrees, "This will surely aid retailers, as the prices are bound to come
down. However they make up only around 15% of the software reseller community so
in a way this will only benefit a select audience."

The reason for such a sentiment is because of the way the
exemption notification has been worded. The official notification states that
"The Central Government...hereby exempts the taxable service..., for packaged or
canned software, intended for single use and packed accordingly, from the whole
of service tax." Most partners however are unclear about what single use
really implies and hence status quo remains.

Devesh Aggarwal, president, Infotech Software Dealers
Association (ISODA) says, "It is good that the ball has been set rolling in the
right direction but it remains to be seen whether this gets implemented.
Distributors are still not clear about the definition of single use and
therefore there is no change in the way dealers are being billed even though the
notification was to come into effect from February 27 onwards. Does single use
mean a single user on a single PC or a single organization?" Concurred Shah of
PH Teknow, "There is no clarity among distributors whether they have to charge
service tax on the counter veiling duty applicable on imported software boxes
and since nothing has been confirmed yet, the billing remains the same. There
are essentially three modes of delivery of software: one is directly in the form
of external media like CDs etc; the second is in the form of paper licenses
along with media; and the third is that which can be electronically downloaded.
It is obvious that the third method is applicable for service tax and that the
first mode is exempt. The confusion arises when it comes to paper licenses."
Salwan adds, "The wording says that the exemption is for retail software boxes
for a single use but does this also cover paper licenses, it is still not
clear." Sudarsan Ranganathan, CEO, Veeras Infotek a software SP based out of
Chennai asks, "When they say that exemption is on licenses for single use, do
they mean single use by one person, one company or an entity? Does a 100 user
license with single instances of the software on each PC also be applicable for
exemption? The ambiguity is over the interpretation of the term single use."

PN Prasad, president, Confed ITA feels that this is just a
ploy by the government to not really commit in terms of actually implementing
reforms and feels this will only remain on paper. "By my own understanding, only
VAT should now be applicable and not service tax. The confusion is over the
wording single use. Now for anti-virus solutions, which come in single user
and three-user packs, does it mean that only the single user packs will be
exempt or are the three users also treated as single use since you will have
three different users on a single instance of the software. In my opinion, the
unnecessary delay caused by the bureaucracy is stalling the whole process of
reforms in this sector. Now we have to wait until GST is implemented for all
this confusion to be finally dealt with once and for all. Normally taxes like
excise and other duties are paid by the vendor itself and the channels are not
troubled. For instance BSNL does not charge service tax to its supply chain
partners. Channels are traders who play the role of bringing the product closer
to the customer and it is not a service that is being provided, why should we be
taxed then?" questions Prasad.

There are others like Nedyumna Gujrathi, sales head,
Winspire Solutions, who from experience felt that this will not make a
difference to their business. "We are a Microsoft partner and our pricing policy
is determined by the dollar-rupee exchange rate and the fluctuations therein, so
at least for MS products, this does not make a difference on the value of the
price from what I have seen over the years. It would make a difference for more
homegrown software packages or solutions like Tally and others," says Gujrathi.

Finally in order to clear the air surrounding the issue,
channels are consulting tax experts as well as government bodies in order to set
the record straight. Teknows Shah said, "We are talking to tax consultants to
get their views on this but in the end we are discussing this with the Finance
Ministry and hopefully the post budget talks will bear positive fruit in our
favor." ISODAs Aggarwal feels that the initiative to seek clarification should
be headed by vendors. "We as a dealer body will be lobbying with both the
Ministry of Finance and the Ministry of Communications & IT to get more clarity
on this. Ideally, this should be driven from the top by vendors but they would
usually say that they do not have a legal entity present here in order to take
this up and therefore the onus lies on the distributors to do it. No one wants
to try and bell the cat," signs off Aggarwal.

John Jacob / DQ Week

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