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B.N. Gururaj, B.A., LL.B. ADVOCATE
1. Prefatory:
Software sector has generally been a cause of thinly disguised envy for other sectors of economy, especially in taxation matters. For over a decade, this sector has enjoyed almost unprecedented tax advantages. But, gradually, these advantages are wearing out, be it Income tax, or Central Excise duty or Service tax or VAT. The tax net is spreading over this sector, which has been generally perceived as pampered one. Even the privileged SEZ has not spared this sector under some circumstances. In this article, the discussion is limited to the aspects of indirect taxes relating to software.
2. Classification and rates of taxes under different laws:
Ignoring for the moment, the complex nature of software business, for the purpose of this article, I may broadly group the taxable transactions as under:
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Sl.No.
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Type of Activity
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Relevant Laws
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1.
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Import and distribution of software on physical media
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Customs Act, 1962 and Customs Tariff Act, 1975
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2.
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Development and sale of software, packaged, or customized
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Central Excise Act, 1944, Central Excise Tariff Act, 1985 and State VAT Acts / CST Act.
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3.
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Internet download of software from foreign sources and distribution within India either electronically or on physical media
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Section 65(105) (zzzze) of the Finance Act, 1994.
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4.
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Sale of key to the customers to enable downloads
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Section 65(105) (zzzze) of the Finance Act, 1994. Applicability of VAT/CST doubtful.
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5.
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Granting licence for use of software
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State VAT Acts.
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6.
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Other software service activities
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Section 65(105) (zzzze) of the Finance Act, 1994.
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7.
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Software and software services from SEZ units
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Section 65(105) (zzzze) of the Finance Act, 1994.
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A. Customs. - Under the Customs law, information technology software is classified under TI 8523 80 20 and is free of duty. There is a definition of “information technology software” in the Supplementary Note to Chapter 85. Someone wrote an article in a prominent website and thought it funny that there is another software related entry in the Customs Tariff, of all the places under Chapter 49, which encompasses printed material. This is under TI 4907 00 30, dealing with “documents of title conveying the right to use information technology software”, attracting 10% duty. SI. No. 157of Notification No. 21/2002-Cus, dated 1-3-2002 unconditionally prescribes the effective rate of duty as nil for both Tariff Items, though for the first one, there was no need to prescribe nil duty, when the tariff entry showed “free” against entry in the rate of duty column.
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