Taxability and classification with respect to Computer software has always been a litigious issue since the erstwhile service tax regime. However, the Goods and Services Tax Act (‘GST’) has to a huge extent clarified the position to be adopted with respect to procurement of computer software.
This article broadly tries to analyse the various implications qua procurement of computer software and whether the same qualifies to be goods or services under GST.
Clarification provided by Government on classification of computer software
- The Central Board of Indirect Taxes and Customs (‘CBIC’) vide FAQs dated 15.12.2018 at Q. No. 17 had clarified that ‘Development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software shall be treated as supply of services as per No. 5 (2)(d) of Schedule –II of the GST law’.
- CBIC vide its sectoral FAQs on Information Technology (‘IT’) and IT enabled services had reiterated that in terms of Schedule II of the CGST Act, ‘upgradation and implementation of information technology software or permitting the use or enjoyment of any intellectual property right are treated as services. But, if a pre-developed or pre-designed software is supplied in any medium/storage (commonly bought off-the-shelf) or made available through the use of encryption keys, the same is treated as a supply of goods classifiable under heading 8523.’
- Ministry of Finance (Department of Revenue) Letter D.O.F No. 334/1/2008 – TRU dated 29.02.2008 – softwares are categorized as ‘normal software’ and ‘specific software’. Normalised software is mass market product generally available in packaged form off the shelf in retail outlets. Specific software is tailored to the specific requirement of the customer and is known as customized software.
Thus, basis the aforesaid clarifications, it can be concluded that if a computer software is procured off-the-shelf or made available through encryption keys, then the same qualifies to be supply of goods. However, in any other case, supply of computer software is classified as supply of services under the Goods and Services Tax Act.
Computer Software bought over the internet and its various implications
There have been numerous instances wherein computer softwares are procured online, i.e. directly over the internet. In such cases, the buyer usually receives a link via e-mail through which the software can be downloaded or the software is sent as an e-mail attachment. The following paragraphs discuss the classification, nature of transaction, rate of tax, eligibility of input tax credit, implications qua customs duty and equalisation levy in case of purchase of computer softwares online:
- Classification of computer software
– In case of online procurement of computer software, companies sell two kinds of software – a general software and a software which is developed as per the specific requirements of the customer.
– As a customised software is tailored as per the pre-determined needs of the customers, such softwares qualify as supply of services in accordance with Sl. No. 5 (2)(d) of Schedule –II of the GST law.
– However, in case the computer software happens to be a generic software or a one which is commonly bought off the shelf, then the same qualifies as supply of goods under the GST law.
- Nature of service
– As majority of the computer softwares which are procured electronically from International Companies are customised softwares, they are classified as supply of services.
– Provisions of Section 2(17) of the IGST Act prescribe the term “online information and database access or retrieval services” as services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as,––
1. advertising on the internet;
2. providing cloud services;
3. provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet;
4. providing data or information, retrievable or otherwise, to any person in electronic form through a computer network;
5. online supplies of digital content (movies, television shows, music and the like);
6. digital data storage; and
7. online gaming;
– Further, CBIC e-flier on Online Information and Database Access or Retrieval Services (‘OIDAR’) has prescribed accessing or downloading software alongwith updates as an OIDAR service.
– Thus, supply of computer software online is classified as an OIDAR service.
- Taxability
– Sr. No. 1 of Notification No. 10/2017 – Integrated Tax (Rate) dated 28.06.2017 prescribes that if any service is supplied by a person located in non-taxable territory to any person who is located in taxable territory (other than non-taxable online recipient), then GST on such service is to be paid by the recipient of service under reverse charge basis.
– Further, Q. No. 17 of CBIC sectoral FAQs has clarified that if online database access services are procured from abroad over the internet, then the recipient, if registered, will have to pay IGST under reverse charge basis.
– Thus, the recipient is liable to pay IGST under reverse charges mechanism at the rate of 18% in accordance with Notification No. 08/2017 – Integrated Tax (Rate) dated 28.06.2017.
- Eligibility of Input tax credit
– Provisions of Section 16(1) of the CGST Act prescribe that ‘every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.’
– As the recipient of computer software usually procures such softwares for the purpose of business or profession, input tax credit of GST paid at the time of procurement is eligible to the recipient.
- Customs duty implications
– One of the primary condition to be fulfilled in order to impose customs duty on any transaction is that the goods should cross the customs frontiers of India.
– As a computer software is usually procured over the internet, it is construed as an import of service under the GST law.
– Without prejudice to above, it is pertinent to note that the World Trade Organisation (WTO) Ministerial Conference Declaration on Global Electronic Commerce No. WT/Min(98)/Dec/2 dated 20.5.1998 has stated that the members of WTO should not impose customs duties on electronic transmissions.
– Reference in this regard is also drawn to the case of Atul Kaushik vs Commissioner of Customs (Export), New Delhi [2015 (330) E.L.T. 417 (Tri. – Del.)] wherein it was held that electronically downloaded software is not liable to Customs Duty as there was no mechanism prescribed under the Customs Act for levy of duty on downloads of software via internet and in absence of any mechanism for collection of tax, levy of tax fails.
– Basis aforesaid, it can be concluded that import of computer software is not liable for customs duty, however, in case the software is imported in form of a DVD, CD or pendrive package, then the software will be classified as goods and liable for customs duty.
- Implications qua Equalisation Levy
– A new provision (Section 165A) was introduced under the Income Tax Act, 1961 vide the Finance Act, 2020 wherein it is prescribed that , there shall be a charge of equalisation levy at the rate of two percent of the amount of consideration received or receivable by an e-commerce operator from e-commerce supply or services made or provided or facilitated by it either-
i. to a person resident in India;
ii. to a non-resident in the specified circumstances; or
iii. to a person who buys such goods or services or both using an IP address located in India.
– The term “e-commerce operator” has been defined to mean “a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both”.
– The Company supplying the software over the internet cannot be construed as an e-commerce operator as the supply which is via digital or electronic platform (i.e. e-mail) is not owned, operated and managed by the software company.
– Thus, the supplier of software does not qualify as an e-commerce operator and thereby not liable to pay equalisation levy.
– However, there is no clarification upon levy of equalisation levy in case of softwares procured via e-mail and thus the aforesaid position of non-levy of equalisation levy may be subject to litigation.
Computer software bought through non-electronic medium
In case of computer softwares which are purchased through a non-electronic medium, i.e. other than over the internet, it is pertinent to note that, such computer software are usually available in a CD or DVD format wherein the buyer has to install the same in its system and operate.
- Classification of computer software
– In such cases, the computer software is available alongwith an encryption key or is a type of software which is generally bought off the shelf.
– Thus, such computer software qualify as goods under the GST law.
- Taxability
– Computer software sold in physical form of Information Technology Software shall apply as goods under the Customs Tariff Act with HSN Code 8523 80 20.
– The GST rate for computer software sold in physical form is also 18%.
- Eligibility of Input tax credit
– Provisions of Section 16(1) of the CGST Act prescribe that ‘every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.’
– As the recipient of computer software usually procures such softwares for the purpose of business or profession, input tax credit of GST paid at the time of procurement is eligible to the recipient.
Conclusion
The various tax positions discussed above are strictly as per the author’s knowledge and are shared for educational purposes only.
Author Bio
Sir what about eway bill if software embedded in pendrive is sold where consignment value is more than 50000/-. Please guide