Chargiability of service tax on software development

[Patrick Taur]

We are a Bangalore custom software development firm. Most of our clients our domestic. We follow a project based billing on quotes determined at the begining of the project(we do bill on actual hourly/monthly basis). We do not have any software products. We have been paying vat @4%. We are not registered with service tax. Our turn over is around 50 lakhs pa. We have recently been informed that we would need to charge both Service tax along with Vat due to the changes in serivce tax rules. Any clarifications on this new change would be appretiated. We are also considering starting a software product line. We seek clarifications on how billing of software products is to be taxed.

AI Summary

Software Development Firms Must Charge Service Tax and VAT: Clarification on Taxation Rules for Custom Software A Bangalore-based custom software development firm inquires about the applicability of service tax on their operations. They currently pay VAT at 4% and are not registered for service tax, with an annual turnover of 50 lakhs. Recent changes suggest they must charge both service tax and VAT. The firm seeks clarification on these changes and on the taxation of potential software products. A respondent clarifies that software development now attracts service tax under the 'information technology software service' category, effective from May 16, 2008. Custom software incurs both service tax and VAT, while packaged software incurs excise duty and VAT.