GST on Import of Software

[Manav Garg]

Whether supply of Software will constitute as Supply of Service or Supply of Goods?

 Understanding:

Generally, organizations enter into licensing agreements under which software is imported for using the same for business purposes. There are generally two ways of importing the software either by downloading it electronically or by loading it on CD.

Indirect Tax Implication:

If supply of software in the physical form (i.e.CD, DVD Packages) of Information Technology Software (branded as well as tailor-made) shall apply as goods under the Customs Tariff Act with HSN Code 8523 80 20. The GST rate for software sold in physical form is also 18%.

The above stand on software has been clarified and confirmed by various Courts. In the case of Tata Consultancy Services v. State of Andhra Pradesh [2004 (11) TMI 11 - SUPREME COURT], it has been held that canned software which is sold in packages or CDs or DVDs or USB Drivers will be classified as goods. Though the copyright of the program would remain with the development company, the moment copies are made and marketed, it would be termed as goods.

As per FAQ on IT/ITES-

Question 1: Whether software is regarded as goods or services in GST?

Answer: In terms of Schedule II of the CGST Act 2017, development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software and temporary transfer or permitting the use or enjoyment of any intellectual property rights are treated as services.

But, if a pre-developed or pre-designed software is supplied in any medium/storage (commonly bought off-the-shelf) or made available through the use of encryption keys, the same is treated as a supply of goods classifiable under heading 8523.

For the software downloaded directly from the website or made available through any electronic medium, then study of following provision is required:

As per Entry No 5(h) of Schedule-II to CGST Act, 2017, temporary transfer or permitting the use or enjoyment of any intellectual property right shall be treated as supply of Service, thus software is covered under the above entry specifically.

Then, import of software from outside India will be considered as Import of Service, further definition of same is extracted thereafter:

As per Section 2(11) of the IGST Act

Import of services means the supply of any service where –

1.      The supplier of service is located outside India;

2.      The recipient of service is located in India; and

3.      The place of supply of service is in India.

 Further, as per Section 7(4) of the IGST Act, 2017,

“Supply of services imported into the territory of India shall be treated to be supply of service in the course of inter-state trade or commerce.”

If the services are covered within the scope of ‘import of service’ then tax would be payable by the recipient of service under GST as per Notification No-10/2017 IGST (Rate) dated 28^th June, 2017

Conclusion:

For the Software downloaded directly from the website or made available by way of any electronic medium shall constitute as supply of service as transfer or royalty payment received for transfer of Intellectual Property Rights relating to software and GST at the rate of 18% under SAC-99733 shall be applicable and liability under reverse charge mechanism shall arise.

In case if software is imported in the form of DVD, CD or pendrive packages then it shall be classified as goods for the purpose of Import Duty and IGST rate shall be 18% as mentioned above.

Applicability of Research & Development Cess:

Research & Development Cess Act, 1986: 

As per section 3 of Research & Development Cess Act, 1986, a cess is leviable by Central Government at a rate not exceeding 5% on all payments made towards import of technology.

According to section 2(h) of Research & Development Cess Act, 1986, “technology” means any special or technical knowledge or any special service required for any purpose whatsoever by an industrial concern under any foreign collaboration and include designs, drawings, publications and technical personnel.

To check the applicability of above, prior consideration of the definition of technology is must.

Discussions to this article

[JAYANTA BANDYOPADHYAY]

Dear Sir,

When software is directly downloaded , at the time of outward forex remittance (Form A1-RBI-FEMA), a practising Chartered Accountant's certificate is insisted upon by Bank. How to vouch this? In case of unintentional omission, should importer be punished? How Customs will regulate such download? Please guide

Regards,

Jayanta Bandyopadhyay

Kolkata

31.7.2020

[YAGAY andSUN]

Form A1 is no more in use.

[YAGAY andSUN]

RBI Master Direction:

C.7.3. Non-physical Imports

(i) Where imports are made in non-physical form, i.e., software or data through internet / datacom channels and drawings and designs through e-mail / fax, a certificate from a Chartered Accountant that the software / data / drawing/ design has been received by the importer, may be obtained.

(ii) AD Category – I bank should advise importers to keep Customs Authorities informed of the imports made by them under this clause.

[JAYANTA BANDYOPADHYAY]

We are going to import physically CD containing systems upgradation kits from USA.All rights therein (collectively, ‘Intellectual Property’) will remain the property of USA . Will it be treated as supply of copyrighted item/goods and not giving rise to royalty as per DTAA with USA.

Sould we make payment without withholding any tax (except Customs duty) . All rights therein (collectively, ‘Intellectual Property’) will remain the property of foreign vendor. Would it be treated as supply of copyrighted item/goods and not giving rise to royalty as per DTAA with USA. Therefore, not liable to tax in India under Income tax.

Kindly guide.

Regards,

Jayanta Bandypadhyay

Howrah-Bengal 13.8.2020