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GST Software Industry - Structure of Indirect Taxes in India

Presently, there are multiple Indirect Taxes being levied in India at different stages, under different circumstances and for different purposes.

A brief overview of some of important Indirect Taxes as under, would enable better understanding of the current Indirect Tax regime in India:

The purpose of levy of tax, incidence and rate of tax (in certain cases) as applicable to software industries is discussed hereunder:

Customs Duty: Custom Duty is levied on goods imported into India. Customs Duty is levied primarily to protect domestic trade and industry, so as to make it competitive in the world market, besides to control the foreign exchange situation by restricting imports and promoting exports. The current effective rate of Customs duty applicable on import of softwares is 12.569% (CVD 8.24% + SAD 4%)8. Paper licenses are regarded as goods and chargeable to Customs Duty of 14.71% (BCD 10% + SAD 4% + Cus Ed.cess 3%).

Value Added Tax (VAT) / Central Sales Tax (CST): When the software is sold within the same State it is liable to VAT @ 4%. When the software is sold from one State to another it is liable to CST @ 2% (against ‘C’ form) or rate of tax applicable in the buyer’s state (without ‘C’ form). The same is also true when dealer trades in software products. In most of the states except states of Gujarat and Madhya Pradesh, the rate of VAT on software is 4%. “Transfer of right to use goods” is considered as sale under State VAT laws. The software developed whether standardized or customized is liable to VAT on supply of the same to the customer as the definition of “sale” is too wide.

Service Tax: Since 2008, supply / development of software or services in relation to development of software are brought into tax net. The rate of Service Tax at present is 10.30%. Following services provided by software industries to another are liable to Service Tax covered under Section 65 (105) (zzzze) of Finance Act, 1994):

  • development of information technology software,
  • study, analysis, design and programming of information technology software,
  • adaptation, upgradation, enhancement, implementation and other similar services related to information technology software,
  • providing advice, consultancy and assistance on matters related to information technology software, including conducting feasibility studies on implementation of a system, specifications for a database design, guidance and assistance during the startup phase of a new system, specifications to secure a database, advice on proprietary information technology software,
  • providing the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other information technology software products.
  • providing the right to use information technology software supplied electronically”;

Information technology software related services are covered under other entries in Service Tax also as under:

  • Consulting engineer service
  • Business Auxiliary service
  • Management, maintenance or repairs service
  • Online information and data access service

Excise Duty: Excise Duty is applicable on manufacture of a product. The rate of Excise Duty applicable on standardized software is 8.24%. However, customized software is exempt from Excise Duty9.

Entry Tax: It is a tax levied on movement of goods from one state to another. However, same is applicable only in few States and rate for the same may vary from one state to another.

Octroi / Cess: It is a tax levied on entry of goods into territory of local authority. It is applicable only in few cities, many cities have replaced Octroi by levying account based Cess.

Stamp Duty: It is duty imposed at state level on certain legal instruments and commercial transactions. The rate of stamp duties varies from state to state. The assignment of copyrights of software may attract Stamp Duty in various states.

 

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