TAXABILITY OF IT SOFTWARE SERVICES

Information Technology Software related Services [Section 66E(d)]

Under clause (d) of section 66E, declared service includes development, design, programming, customization, adaptation, upgradation, enhancement and implementation of Information Technology Software (ITS).

The term ‘information technology software’ has been defined in section 65B(28) of the Act as ‘any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment’.

Scope of Information Technology Software (ITS)

Service will include -

Design - plan, scheme

Programming - process of writing a computer programme

Customization - modifying to meet a specific requirement

Adaptation - change to suit, adopt

Upgradation - raising standard, improving quality/version/features

Enhancement - in value, content, quality

Implementation - execution

A similar definition existed in erstwhile section 65(53a) prior to Finance Act, 2012 (upto 30-6-2012). ‘Information technology software’ means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment.

Accordingly, information technology software (ITS) should have the following features -

(i) ITS is a representation.

(ii) Representation in ITS should be of any of the following : -

• Instruction
• Data
• Sound
• Image
• Source code
• Object code

(iii) Such items represented should be recorded in a machine readable form.

(iv) Such items represented and recorded should be capable of being manipulated.

(v) They should provide interactivity to a user.

(vi) Interactivity can be provided by way of a -

• computer, or
• automatic data processing machine, or
• any other device or equipment.

Examples of possible inclusion/exclusion under Information Technology Software Services

• Development of software and sale on media - This is purely goods in nature and liable to VAT, not to Service Tax.

• Sale of licenses - This is a deemed sale as it is right to use the software for a particular period and as software is goods, therefore, it is liable for VAT.
• Customised software - Customised software sold to the customers as per their customised needs may be liable to VAT as well as to Service Tax.
• Hiring professionally qualified persons with certain competencies and billed on day’s basis - If service receiver will direct the professionals as per his instructions, it will not include any transfer of property in goods and thus VAT may not be applicable, but Service Tax will.
• Implementation of software/calibration of software/ going live - This is a case of pure service in which one enables or disables the various masters, controls to make the software run as required by the customer and as such, liable to pay service tax.

• Testing of software - It includes confirmation regarding functionality or usage of the software programs, is pure service in nature and liable for Service Tax.
• Instant messaging, social networking - These may be considered as service.
• Music/video/games on mobile - in case the games/video/games are transferred, it may be liable to VAT but if it is online access, it may be liable to Service Tax.
• Maintenance of software - This may be covered under works contract or purely service and accordingly taxed.
• Software as a service if on server/cloud - This is a new methodology where the control and possession of the data/ programs being accessed remain with the service provider [ISP] which may be hosted on the server of the vendor in or outside India. The contract allows the customer to access the site and enjoy certain privileges. This would be covered under Service Tax.
• Updates and upgrades [Patches] - This includes smaller programs and therefore may be liable to VAT and Service Tax.
• Disaster Management: This is a service which may be taken up as a preventive measure or corrective after happening of the disaster. Wherever goods [hardware / ready software] are transferred or right to use goods are provided, it would be liable to VAT. Where the service provider provides the service of mirroring, alternative site with his own equipment like servers, cloud etc, it would only be a service and taxed accordingly.

Some other examples of taxable services w.e.f. 1.7.2012

• Sale of pre-packaged or canned software is sale of goods
• A mere license to use such canned software, which is not transfer of “right to use” is a provision of service
• On-site development of software is a service
• Internet downloads is also a service.