Recently, the government issued fresh set of notifications rescinding the earlier ones which granted exemption from payment of Service tax on canned / packaged software if Excise duty / Customs duty (CVD) was paid. Similar set of exemption notifications had granted exemption from payment of Excise duty / Customs duty (CVD – in lieu of Excise duty) if Service tax was paid.
These new set of notifications might result in re-igniting the controversy for the software industry which seemed to be settled by the budget notifications issued last year.
A brief synopsis of the new notifications and its implications is explained in the following table:
|51/2010-ST dated 21 December 2010||It rescinds Notification No 02/2010 – ST dated 27 February 2010 which provided Service tax exemption to ‘Information Technology Software Services’ in relation to providing right to use packaged or canned software intended for single use subject to inter alia condition that appropriate duties of excise have been paid|
|52/2010-ST dated 21 December 2010||It rescinds Notification No 17/2010 – ST dated 27 February 2010 which provided Service tax exemption to ‘Information Technology Software Services’ in relation to providing right to use packaged or canned software intended for single use subject to inter alia condition that appropriate duties of customs have been paid|
|126/2010-Customs dated 21December 2010||It rescinds Notification No 31/2010 – Customs dated 27 February 2010 which provided exemption to CVD portion of the value of packaged or canned software to the extent such value represented the consideration paid or payable for transfer of right to use software|
|35/2010 – CE dated 21 December 2010||It rescinds Notification No 17/20 10 – CE dated 27 February 2010 which provided excise duty exemption on the portion of the value of packaged or canned software to the extent such value represented the consideration paid or payable for transfer of right to use software|
|53/2010-ST dated 21 December 2010||The Government, vide this Notification, have restored the Service tax exemption granted in relation to providing right to use packaged or canned software covered under clause (v) of the definition subject to following conditions:
• the value of the packaged or canned software (whether procured domestically or imported), for the purposes of levy of Excise duty or CVD, has been determined under section 4A of the Central Excise Act, 1994 (i.e. Maximum Retail Price (MRP) based valuation);
[In this regard, it is pertinent to note that simultaneously Government have also notified ‘packaged or canned software’ as specified goods subject to MRP based levy with abatement of 15 percent vide Notification No. 30/ 2010-Central Excise (N.T.) dated 21 December 2010]
• appropriate duties of excise or customs (including CVD) on such value have been paid; and
• service provider declares on the invoice that no amount in excess of the retail sale price has been recovered from the customer
The software industry has been facing the brunt of double taxes – VAT v. Service tax, Excise v. Service tax etc for quite sometime.
While the debate on applicability of VAT or Service tax still continues, relief from double taxation wherein central levies like excise duty, customs duty and service tax are involved was granted by the notifications issued in the last year’s budget.
These notifications ensured that only duty i.e. either Excise duty / Customs duty (CVD) or Service tax was payable. The benefit of these exemption notifications was available for a transaction where licenses for right to use the canned / packaged software were given by the software companies to its customers. Further, disputes relating to valuation and appropriate levy, when the right to use software was given by way of paper licenses, were addressed, since exemption from Excise duty / Customs duty (CVD) had been granted if Service tax was paid on consideration towards right to use the software.
The new exemption notification now provides for exemption from service tax only if the Excise duty / Customs duty (CVD) is paid on the canned / packaged software on the basis of valuation mechanism prescribed by Section 4A of the Central Excise Act i.e. Maximum Retail Price (MRP) minus the prescribed abatement of 15 percent.
Subsequent sale of canned / standard software should not be impacted and the benefit of exemption from payment of service tax should be available if appropriate excise duty / customs duty (CVD) has been paid. However, where sales are made to institutional / industrial customers (wherein affixation of MRP may not be required) the issue of appropriate levy is now again open to interpretation. Also, the software industry may again face uncertainty on matters of valuation and appropriate levy when paper licenses are sold to customers.
Henceforth, software companies engaged in manufacture of canned / packaged software may now be required to obtain registration both with excise and service tax authorities if sales of canned / packaged software are made to individual customers as well as to institutional / industrial customers.
Further, the compliances under the Standards of Weights and Measures Act, 1976 would also be required to be undertaken for affixation of MRP wherever applicable.