Vat and service tax on software

[K P RAMASWAMY]

we have been charged by the vendors for the customised software service tax and VAT.Is it correct?

[Rama Krishana]

A general understanding of the law is one transaction can not be both i.e (i) sale and (ii) service. Therefore, your question seems to be valid. It is also learned that various petitions are pending before various authorities in this regard. On the other hand, levy of tax on the same transaction is for different reasoning. Therefore, it is suggested that you should pay both the taxes if you do not want to invite the litigation and avoid the cost of litigation.

[DEV KUMAR KOTHARI]

Customized software is made for you only. It is not a packaged software liable to VAT. What you havavailed is service under a contract for works and not under a contract for supply of goods. VAT may be charged for material provided to you like CD, DVD, packaged software for operations or use in conjunction of tailor made software. But not for the software developed by service provider for your use only and for which the service provider does not have copy right. In case service provider is free to sell the same software to to others then the case may fall in catagory of packaged software liable to VAT. Entire contractual terms and conditions need to be reviewed.

[DEV KUMAR KOTHARI]

Customized software is made for you only. It is not a packaged software liable to VAT. What you havavailed is service under a contract for works and not under a contract for supply of goods. VAT may be charged for material provided to you like CD, DVD, packaged software for operations or use in conjunction of tailor made software. But not for the software developed by service provider for your use only and for which the service provider does not have copy right. In case service provider is free to sell the same software to to others then the case may fall in catagory of packaged software liable to VAT. Entire contractual terms and conditions need to be reviewed.

AI Summary

Classification of software as service or sale determines tax treatment; customised software is service, packaged copies may attract VAT.
Classification of software as either a supply of goods or a supply of services determines VAT or service tax liability. Customized software created exclusively for a client is typically a service under a works contract and not subject to VAT, while VAT may apply to packaged software or tangible media supplied with the service. Retained resale rights by the supplier can bring the transaction within packaged-software VAT treatment. Contractual terms, IP ownership, and resale rights are decisive for tax characterisation.