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.

As per the recently included category of 'information technology software service' effective from 16.5.08, activities such as development of software would attract Service tax. It would also attract VAT as per the relevant VAT provisions, though logically both levies cannot be made together. If you are developing software which is of customer made, then it would attract service tax and VAT, while if the software is in the nature of 'packaged software' i.e. to be sold off the self, then it would attract excise duty @ 8% (and not service tax) and VAT.

AI Summary

Service tax on software development applies to bespoke software, while packaged software is treated under excise duty instead.
Development of customised or customer-specific software is subject to service tax and also falls within the VAT net, whereas off the shelf packaged software is treated as a manufactured product attracting excise duty rather than service tax, while remaining subject to VAT under applicable provisions.