SERVICE TAX EXEMPTION TO PACKAGED / CUSTOMIZED SOFTWARE

[Dr. Sanjiv Agarwal]

Presently, software in India is subject to levy of multiple taxes in the form of Central Excise, Customs duty, Service Tax and Value added tax (VAT) as follows –

• Pre-packaged software is goods and leviable to Excise duty (Customs duties, if imported), subject to exemptions available if any (presently, packaged software is included in the Third Schedule to the Central Excise Act and liable to duty of excise on the basis of their Retail Sale Price, as per Section 4A).
• When such packaged software is sold, appropriate VAT/CST is payable and when it is only licensed, Service Tax is payable.
• Development of a customised software is a service but customised software, loaded in a medium is also goods and liable to Excise duty, subject to exemptions, if any. (presently, it is exempted from excise duty vide S. No. 266 of Notification No. 12/2012-C.E.).

W.e.f. 01.03.2016, relief has been provided to assessees to avoid simultaneous levy of Excise Duty, Customs Duty and Service Tax by way of Notification Nos. 11/2016-ST, 11/2016-CE and 11/2016-CU, all dated 01.03.2016.

Notification No. 14/2011-C.E. dated 1-3-2011 provide for exemption from payment of excise duty on packaged software if such packaged software is not required to be affixed with RSP under Legal Metrology Act / Rules, on a value attributable to consideration for licensing such packaged software. Similar exemption is available for CVD also, under Notification No. 25/2011-CU dated 01.03.2011. These exemptions were applicable only for packaged software. In other words, when packaged software is liable to Excise duty /CVD under Section 4 of the Central Excise Act, the value could be split between the value for goods (on which Excise duty /CVD is applicable) and value for service (on which Service Tax is applicable). This facility has been extended to customised software also, vide Notification No. 11/2016-CE. dated 1-3-2016, superseding Notification No. 14/2011-C.E. for central excise and vide Notification No. 11/2016-CU  dated 1-3-2016, superseding Notification No. 25/2011-CU for CVD.

It is now legally permissible to split the value of "goods" and "service" in case of any software and pay Excise Duty (wherever applicable) and Service Tax on such respective values.

Vide Notification No. 11/2016-S.T. dated 1-3-2016, it has been provided that when Excise duty is paid on domestically manufactured software on the  basis their RSP, as per Section 4A of the Central Excise Act, 1944 or in case of imported software, CVD is paid on the basis their RSP, as per Section 4A of the Central Excise Act, 1944, then any licensing of such software would be exempted from payment of Service Tax. Prior to this notification, when packaged software was licensed (without making the transaction as a sale), both excise duty /CVD and Service Tax were payable.

The position w.e.f. 01.03.2016 emerges as follows –

Packaged Software

• If manufactured in India, pay Excise duty on the basis of RSP, if RSP is required to be affixed under Legal Metrology Act / Rules.
• If imported in India, pay CVD on the basis of RSP, if RSP is required to be affixed under Legal Metrology Act / Rules.
• If packaged software is sold, there is no Service Tax liability but appropriate VAT /CST has to be paid.
• If packaged software on which Excise duty / CVD is paid on the basis of Section 4A , is not sold, but only licensed, no Service Tax is payable as per Notification No. 11 /2016-S.T. dated 1-3-2016.
• If there is no requirement to affix RSP as per Legal Metrology Act/Rules, Excise duty /CVD is payable on the basis of transaction value.
• In such cases, if software is not sold but only licensed, Service Tax will apply and the value can be apportioned between the 'goods' part and 'service' part. The value on which service tax is paid can be excluded for the purpose of levy of Excise duty /CVD, as per Notification No. 11 /2016-CE dated 1-3-2016.

Customised Software

• If manufactured in India, Excise duty is exempted vide S. No. 266 of Notification No. 12/2012-C.E.) .
• If imported in India, no CVD is payable in view of the exemption.
• If the software is sold, there is no Service Tax liability but appropriate VAT /CST has to be paid.
• If such software is not sold but only licensed, Service Tax will apply and the value can be apportioned between the 'goods' part and 'service' part and Service Tax can be paid on the value attributable to service. There would be no levy of Excise duty /CVD as the same is exempted.

CBEC has vide its letter No. DOF No. 334/8/2016-TRU dated 29.02.2016 has clarified as follows :-

"5.1 With effect from 21.12.2010, media falling under Chapter 85 with recorded Information Technology Software has been notified under section 4A of the Central Excise Act. Accordingly, Central Excise duty/CVD is to be paid on the value of such media with recorded Information Technology Software and the assessable value of such media is required to be determined on the basis of the retail sale price (RSP) affixed on the package of such media under the Legal Metrology Act, 2009 (1 of 2010) or the rules made thereunder. In respect of transactions involving supply of such media bearing RSP, not amounting to sale/deemed sale, service tax is being exempted. Thus, only Central Excise duty is levied on such transactions. (Notification No. 11/2016-ST dated 1st March 2016 refers)

5.2 In certain situations like delivering customised software on media, such media with recorded Information Technology Software, is not required to bear the RSP when supplied domestically or imported. Difficulties are being experienced in the assessment of such media to Central Excise duty/CVD besides giving rise to the issue of double taxation – levy of Central Excise duty/CVD as well as service tax. In order to resolve the issue, media with recorded Information Technology Software which is not required to bear RSP, is being exempted from so much of the Central Excise duty/CVD as is equivalent to the duty payable on the portion of the value of such Information Technology Software recorded on the said media, which is leviable to service tax. In such cases, manufacturer/importer would therefore be required to pay Central Excise duty/CVD only on that portion of value representing the value of the medium on which it is recorded along with freight and insurance. The exemption is subject to the fulfillment of certain conditions. Thus, the levy of Central Excise duty/CVD and service tax will be mutually exclusive. (Notification No. 11/2016-ST and 11/2016-Customs, both dated 1st March 2016 refers)"