Taxation of software: ambiguities unresolved

In India, the taxation of software has been the subject of constant dispute and legislative review. One such issue is the unresolved overlap between value added tax (VAT) levied by the state governments on transactions entailing sale of goods, and service tax levied by the centre on the supply of software.

A recent view

In Infotech Software Dealers Association v UOI, Madras High Court expressed its views about this duality of taxes. This case pertains to the levy of service tax on supply of shrink wrap software under the information technology software service (ITSS), a taxing entry introduced by the Finance Act, 2008. This taxing entry seeks to levy service tax on the supply of customized software alone, with effect from 16 May 2008.

The members of Infotech Software Dealers Association (ISODA) resell software as shrink wrap software, through multiple user software licences or internet downloads. They enter into master end user licence agreements (master EULA) with the developers of software, and end user licence agreements (EULA) with their customers. Software supplied under EULA, whereby the end user was given a limited right to use the software was the subject matter of the detailed findings of the court. In view of the Supreme Court decision in Tata Consultancy Services v State of AP, all such transactions attract VAT and sales tax.

Through this case, ISODA challenged the levy of service tax on software, on the basis that was against the Indian constitution and that since software constitutes goods, the state government and not the central government was competent to tax it.

Economic Laws Practice is a full service law firm headquartered in Mumbai and has offices in New Delhi, Pune and Ahmedabad. The authors can be reached at gauravbhandari@elp-in.com and anuradhamohanty@elp-in.com.