gst in india  

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GST Software Industry - Issues faced by software industries in relation to Indirect Taxes at present

Multiple taxes

There are various taxes applicable to software industry on different aspects and values. Taxes like VAT, CST, Service Tax, Entry Tax, Customs Duty, Central Excise Duty, Education cesses, etc are few to name. It becomes quite difficult to operate under different tax statutes levying taxes on different aspects of a single activity. The cost of compliance and chances of lapses are bound to remain very high in such a scenario.

Overlapping of taxes

Apart from multiple taxes, the bigger issue is over lapping of indirect taxes on the same activity and value component. Some of such incidences have been discussed hereunder:

Licensing of software: As observed from above, same transaction attracts many taxes. The activity of licensing of software being an activity of transferring right to use falls under the definition of sale and attracts VAT, further the same transaction is considered as service and attracts Service Tax under sub clause (v) and (vi) of Section 65 (105) (zzzze) of the Finance Act, 1994 if the right to use has been granted in case of software supplied electronically or if the right to use software has been provided electronically for commercial exploitation.

Software development: VAT is applicable on both standardized and customized softwares. The same transaction also attracts Excise Duty in the case of manufacturing of standardized (off the shelf) software. Further, the activity of development of software and providing right to use software electronically also attracts Service Tax.

Import of software: In case software is imported the same is also liable to Customs Duty apart from Service Tax under Service Tax (Import of Service Rules). Exemption has been granted to canned or packaged software to the extent of value which represents transfer of rights to use goods subject to certain conditions. However it appears to be an eyewash as, normally it is not a general trade practice to show separately the value towards right to use in invoice.

Courts have tried to resolve the confusion by holding that software whether customized or standardized are Goods10. Apex Court have laid down that there could not be two taxes on the same value11 component of transaction. However due to existence of confusing provisions under different laws, the industry have taken a rather conservative view and preferred to pay multiple taxes like VAT and Service Tax both on the same value of sale of software. Retrospective amendments in law to overrule court judgments and absence of getting the Advance Rulings by resident persons have compelled industry stay away from sticking to a single tax (i.e VAT) on such transactions. Non availability of advance rulings to Indian residents software developers is one more reason of charging dual taxes on the transaction of sale / grant of license of software.

No seamless input credit mechanism across state / central taxes

At present, credit of tax paid at state level is not allowed to be set off against tax paid at Central level and vice versa. For e.g. VAT paid at the time of purchase of goods is not allowed to be set off against Service Tax / Excise Duty liability, This leads to increase in costs for the service provider / manufacturer which is ultimately passed on the consumer and it leads to increase in price of final product. The same is also true when Service Tax / Excise is paid at time of availment of input services / inputs which is not allowed as set off against VAT liability.

It would be pertinent to note that in UK VAT law, credit is granted of tax paid on goods against liability on services and vice versa. This leads to reduction in burden of taxes from point of view of the assessee and lower price of the ultimate product. Such cross activity credit has resulted the industry to boom.

Delay in getting refunds

The exporters of services are finding it hard to get refund from the department. There are around Rs. 2,000 crores refund claims pending with the department. Despite of Notifications, Circulars and Clarifications issued by the department where process of refund is made easier, exporters are not amused, they are of the view that it is very cumbersome and time consuming to get refund from the department. Such delay in huge amount of refunds has resulted in considerable amount of blockage of funds of the assessee and hampers their routine business. Further department does not give adequate interest for delay in refunding the amount.

Further department also raises queries and issues Show Cause Notices which may or may not be necessary to keep the refund application on hold. They also ask for additional documents / information which many times assessee finds it difficult to furnish. Such delay in furnishing documents, ultimately leads to rejection of the application.


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