MARCH 01, 2006

By Joseph Prabakar, Advocate

IT industry is hit badly in Budget 2006-07. The most unexpected news came for the computer manufacturers in the form of imposition of excise duty of 12%. This imposition is not in tune with the present trend in the light of the budget speech containing a paragraph about the thrust on spread of Information Technology (IT) and IT Enabled Services (ITES) and to make India a preferred destination for high technology IT products.

To add to the woes of the IT industry, the Government has proposed a 8% excise duty on packaged software or canned software. In order to avoid any issues on interpretation of the term 'packaged software or canned software', especially in view of the recent sales tax decision of the Supreme Court in the case of Tata Consultancy Services, the meaning of the term is provided in the notification itself. Any software that is developed to meet the needs of variety of users and which is capable of or intended for being sold off the shelf would be called as 'packaged software or canned software' and would attract excise duty levy of 8%.

There is a major area of litigation in store in the near future on interpretation of various terms like 'Information Technology Software', 'Customized Software' 'Branded Software', Unbranded Software', 'Canned Software, 'Un-canned Software', and now the newly coined 'Packaged Software'.

There is bad news for IT industry on the service tax front as well. The controversy on whether maintenance of software would attract service tax under the taxable category of 'Repairs or Maintenance services' has come to an end. The Government seems to be keen on levying service tax on this activity and to achieve this purpose, the activity of 'maintenance of software' which figured under the exclusion clause of Information technology services under the Business Auxiliary services has now been removed. Also, computerized data Processing would now be a taxable service under the category of Business Auxiliary services. The exclusion of 'Information technology services' would henceforth be restricted to 'design and development of software' only.

Simultaneously, the Government had also withdrawn the exemption for Enterprise Resource Planning (ERP) services under the taxable category of Management Consultant. Further the definition of Management Consultant has been expanded to include the services relating to 'management of Information Technology Resources'. Exemption granted to Call Centres and Medical Transcription Centers under the category of Business Auxiliary services has been withdrawn. On the whole, the IT industry would now be severely affected in view of the above proposals.

In addition to the imposition of excise duty, it may be noted that 'packaged software or canned software' also attract VAT / sales tax at the rate of 4% in most of the states. Computers also attract VAT / sales tax at the rate of 4%. Thus, starting right from manufacture, sale and service or maintenance of computers and software would now attract Excise duty, VAT/Sales tax and Service tax. This is indeed a very big burden and would retard the growth of the IT sector.

(The views expressed are personal of the author)