The IT/ITES sector has been among the key contributors to India's exponential economic growth over the last decade. And the sector had been getting due focus from direct as well as indirect tax perspective in the form of various concessions.
The recent past, however, has seen IT/ITES companies facing a number of challenges such as depreciation in the US Dollar, fears of a US recession and increased manpower costs. Thus, the industry was looking up to the Union Budget to get certain long pending demands fulfilled.
Though the biggest expectation concerning the extension of the STPI scheme beyond 2009 was left unaddressed, Service tax has been proposed to be levied on all conceivable IT services. IT services were thus far excluded from service tax ambit, on account of which software services exporters were unable to utilise the mechanism put in place for refund of input service tax, and this cost hitherto undermined their competitiveness in the global market. In the Budget, the Hon'ble finance minister proposed to correct this anomaly with the introduction of a new service category, called 'Information Technology Software services', as well as with amendment in certain other existing categories. Thus, upon implementation of the budget proposals, virtually all activities relating to IT software would be covered under Service tax net, thereby making them eligible to refund, subject to fulfilling other export conditions.
Apart from including the excluded services within the levy, another amendment which would prove very significant to the industry relates to changes in the qualification criteria under the Service Tax Export and Import Rules for maintenance, testing and certification services. Software is/would be covered under these categories for certain transactions, and the amendment provides an export benefit or a reverse charge liability depending on the location of the goods, material or immovable property, in relation to which the services are provided, at the time of the service being rendered.
While the above amendments are likely to hugely benefit the exporters of IT services, the impact on importers/domestic users of IT services is yet to be seen. As far as importers/ domestic users of IT services are concerned, the implications of another aspect proposed to be covered under the new levy, namely 'acquisition of right-to-use IT software for commercial exploitation; and acquisition of right-to-use IT software supplied electronically' would be of remarkable relevance.
With this proposal, rights to reproduce, distribute and sell software would become liable to Service tax. Though it remains to be seen whether only customized software would fall in this levy or also packaged software. And, it would be interesting to see the reaction of State VAT authorities on this proposal as they were seeking to levy VAT on transfer of right to use customized software, while packaged software is already liable to VAT. Further, import of right to use software download electrically, which was hitherto not liable to Customs duty may now be liable to Service tax.
Historic conflict of dual levy and applicability of aspect theory are also likely to trigger in again. Implications also need to be examined given the wide coverage of the definition of IT software under Service tax, which includes any data capable of being manipulated by means of any devise or equipment.
Supriya Oberoi Jain, senior manager (Indirect Tax), KPMG India Private Limited
http://in.news.yahoo.com/financialexpress/20080303/r_t_fe_bs_budget08/tbs-tax-on-it-services-bane-or-boon-7435665.html
The recent past, however, has seen IT/ITES companies facing a number of challenges such as depreciation in the US Dollar, fears of a US recession and increased manpower costs. Thus, the industry was looking up to the Union Budget to get certain long pending demands fulfilled.
Though the biggest expectation concerning the extension of the STPI scheme beyond 2009 was left unaddressed, Service tax has been proposed to be levied on all conceivable IT services. IT services were thus far excluded from service tax ambit, on account of which software services exporters were unable to utilise the mechanism put in place for refund of input service tax, and this cost hitherto undermined their competitiveness in the global market. In the Budget, the Hon'ble finance minister proposed to correct this anomaly with the introduction of a new service category, called 'Information Technology Software services', as well as with amendment in certain other existing categories. Thus, upon implementation of the budget proposals, virtually all activities relating to IT software would be covered under Service tax net, thereby making them eligible to refund, subject to fulfilling other export conditions.
Apart from including the excluded services within the levy, another amendment which would prove very significant to the industry relates to changes in the qualification criteria under the Service Tax Export and Import Rules for maintenance, testing and certification services. Software is/would be covered under these categories for certain transactions, and the amendment provides an export benefit or a reverse charge liability depending on the location of the goods, material or immovable property, in relation to which the services are provided, at the time of the service being rendered.
While the above amendments are likely to hugely benefit the exporters of IT services, the impact on importers/domestic users of IT services is yet to be seen. As far as importers/ domestic users of IT services are concerned, the implications of another aspect proposed to be covered under the new levy, namely 'acquisition of right-to-use IT software for commercial exploitation; and acquisition of right-to-use IT software supplied electronically' would be of remarkable relevance.
With this proposal, rights to reproduce, distribute and sell software would become liable to Service tax. Though it remains to be seen whether only customized software would fall in this levy or also packaged software. And, it would be interesting to see the reaction of State VAT authorities on this proposal as they were seeking to levy VAT on transfer of right to use customized software, while packaged software is already liable to VAT. Further, import of right to use software download electrically, which was hitherto not liable to Customs duty may now be liable to Service tax.
Historic conflict of dual levy and applicability of aspect theory are also likely to trigger in again. Implications also need to be examined given the wide coverage of the definition of IT software under Service tax, which includes any data capable of being manipulated by means of any devise or equipment.
Supriya Oberoi Jain, senior manager (Indirect Tax), KPMG India Private Limited
http://in.news.yahoo.com/financialexpress/20080303/r_t_fe_bs_budget08/tbs-tax-on-it-services-bane-or-boon-7435665.html
