Sale of software liable to service tax

It is stated that Software is composed of programs, data and documents. Each of these items comprises a configuration that is created as part of the software engineering process. Rahul Matthan, a software program is essentially a series of commands issued to the hardware of the computer that enables the computer to perform in a particular manner. It may not be possible for us to discuss service tax and vat in all of the above cases but we can discuss the fundamentals to allow us to analyse of different transactions.

Firstly, for the sake of simplicity, we shall define uncanned software as softwares which are not canned Simple!! Now, canned software means for purpose of our discussion a software product or solution, usually purchased from a software company, which cannot be modified or altered beyond the original functionality. The customers are licensees with permission to use or sub-licence these packages to others. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer.

Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i. Thus a transaction sale of computer software is clearly a sale of "goods" within the meaning of the term as defined in the said Act. It is a settled position of law that pre-packaged or canned software which is put on a media is in the nature of goods [Supreme Court judgment in case of Tata Consultancy Services v.

Sale of pre-packaged or canned software is, therefore, in the nature of sale of goods and is not covered in this entry. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others. During the period of contract exclusive right to use goods along with permits, licences, etc. To bring the deemed sale under Article 29A d of the Constitution of India , there must be a transfer of right to use any goods and when the goods as such is not transferred, the question of deeming sale of goods does not arise and in that sense, the transaction would be only a service and not a sale.

To Understand the software transactions taxability in terms of Service tax and VAT one needs to thoroughly equipped with the various tax criterions as detailed hereunder Supply of basic software along with subsequent customisation thereof to meet requirements of customer and training to his employees under a single contract is a single indivisible supply of service and whole of the receipts are liable to service tax on Dominant nature test. Since majorly the software industry is engaged in exports and the charge of service tax as governed by Section 66B is purely dependent on where the services are rendered hence the concept of place of providing the services gains force in understanding the service tax implications.

We will discuss in detail under the export of services so as to how this concept of POPS is that very essential. Provided that in case the location of the service receiver is not available in the ordinary course of business, the place of provision shall be the location of the provider of service. Now, lets us come on major discussion i. Rule 6A of Service Tax Rules, Firstly, It is important to note that there is no ambiguity on the fact that once the services are rendered outside India there is no charge and hence no service tax shall be applicable.

But the story does not stop here!!. What about the Cenvat that the Exporter has incurred. Rule 5 refund to exporter r. Rule 6 which caters to cenvat attributable to exempted service of Cenvat Credit Rules, such service must test all the parameters as laid down in Rule 6A of STR, It is not the case.

Rule 6A , STR, is fundamentally to govern the benefits of Cenvat Credit to the exporter and stands effective in all terms. There is urgent need of a white paper from the Industry Associations to be represented to the law makers which can provide more defining and clear cut laws for such complex transactions. He can be reached at ankitgulgulia at the rate of gmail. Anraj v. National Thermal Power Corpn. Cement Manufacturers' Association v. State of M. By: CA. Ankit Gulgulia - June 18, Very Good Articles The software industry has been bearing the multiple tax muddle for a long time.

In each of these rulings, nexus was based on the taxpayer's ownership of actual or constructive software licenses used by customers in the state. Like Texas, New Mexico treats a "license to use" as a form of "property. Numerous states are taking the position that the license of software creates a collection and remittance responsibility for the software seller.

Software sellers beware. The way a state will find you is when they audit one of your in-state customers and see your invoice without sales tax.

The auditor typically goes back to their office the same day and sends the software seller a questionnaire and that becomes the beginning of what typically turns out to be a bad situation for the out-of-state software seller.

Sellers of "anything" should remember, if you are deemed to have nexus in a state, you typically get one chance to collect the applicable sales tax from your customers upon initial sale. If you do not collect and remit and the state determines you had nexus, the sales tax liability that initially belonged to your customer now belongs to you.

Back to the concept of no "free lunch" when it comes to sales tax. If the software seller does not charge tax and software is deemed taxable in a customer's state, use tax needs to be remitted on the business customer's sales tax return and individuals need to follow their respective state's rules on how to remit use tax.

While many businesses and individuals do not voluntarily remit use tax, be careful. There are so many states beefing up their audit function that may make it just a matter of time before you get the dreaded letter in the mail.

He can be reached by phone at or via email at dseiden citrincooperman. Main Menu U. The shift to remotely accessed software and the growing popularity of SaaS have significant implications for sales and use taxes.

Unfortunately, states have been slow to catch up. Regulations remain stuck in the era of tangible delivery, and practitioners are often left to rely on guidance that is limited to private letter rulings, hastily drafted bulletins, or undocumented department policies. Compliance requires careful consideration of myriad factors, including nexus, taxability, and how to source the revenues from customers.

States may require a vendor to collect sales or use taxes only if that vendor's activities establish a nexus or minimum connection with the state. If this connection is established, the vendor is subsequently compelled to collect the requisite tax from the purchaser and remit the tax to the state. Cloud - computing vendors must consider server location in determining nexus risk. Placing a server in a state generally creates a physical presence within that state, resulting in nexus. Other nexus - creating activities include placing employees; physically soliciting sales; and performing various installation, customization, or training activities in the state.

States have enacted laws attempting to extend nexus to vendors lacking the typical in - state physical presence of employees, agents, independent contractors, or property.

These laws rely on click - through , affiliate, related - party , and controlled - group nexus theories. Cloud - computing vendors should refer to the typical physical presence and alternate bases of nexus when determining whether they have sales tax responsibilities to a particular state. Some states may characterize SaaS transactions as taxable sales of tangible personal property, often by defining them as licenses or sales of prewritten computer software. Thus, selling SaaS to an out - of - state customer, where a vendor grants a software license, may be interpreted as the vendor's being deemed to own tangible property in the state where the customer is located.

This position could lead state revenue authorities to assert that vendors have nexus in states where they otherwise would not under a traditional physical presence test. After determining nexus, sellers and consumers must tackle the potentially overwhelming question of whether a particular state subjects SaaS to sales and use tax. States broadly interpret their sales - and - use - tax statutes as they apply to SaaS transactions and either 1 explicitly enumerate that SaaS receipts are a taxable service; 2 view the sale of SaaS as the taxable electronic delivery or constructive possession of prewritten software i.

In states in which services are not taxable, or specifically enumerated, the analysis becomes whether the SaaS transaction represents a purchase of tangible personal property. Some states may treat SaaS as a taxable acquisition of tangible personal property, while other states may consider it a service, rendering the sale not taxable unless specifically enumerated.