VAT Input Credit on Software License

[Dinesh Kumar T S]

A manufacturing concern obtained a software license for certain period. The service provider has charged 4% VAT (Tamilnadu VAT) in the bill in addition to service tax. The company is eligible for taking credit of Input VAT for other goods.Whether input tax credit be availed by the manufacturing concern for software License?

[YAGAY and SUN]

Dear Dinesh,

Under Section 2 (24) of the TNVAT Act  “input tax” means the tax paid or payable under this Act by a registered dealer to another registered dealer on the purchase of goods including capital goods in the course of his business;

Further, also refer Section 19 (3) of the TNVAT Act, Every registered dealer, in respect of purchases of capital goods wholly for use in the course of business of taxable goods, shall be allowed input tax credit in the manner prescribed.

Since Software licenses are being capitalized and treated as Capital Goods for the purpose for use in the course of business of taxable goods, it is presumed that ITC on Software license should be allowed.Though ITC on Software License has not been specifically denied in the TNVAT Act but it is advisable to take an opinion from your consultant or you can go for VAT Clarification from the Department itself or go for Advance Ruling under TNVAT Act.

Best Regards,

Pradeep Khatri

AI Summary

Input tax credit on software licenses may be available where licensed software is treated as capital goods.
Where software licences are capitalised and treated as capital goods used in the course of taxable business, input tax credit is consistent with the TNVAT Act definition of input tax and the allowance for credit on capital goods; however, due to absence of an express statutory denial, seek consultant advice or obtain departmental clarification or an advance ruling before claiming the credit.