Service tax on software licence

Whether MVAT is also applicable to the same? To answer the query, the following crucial questions will have to be addressed :. Is it a service chargeable to Service Tax under Cl. What is the value chargeable to Service Tax, if applicable? Considering all the relevant facts, and the law as discussed hereinabove, and relying and based on the same as mentioned above, we reach the conclusion that :. However in case of the software dealer the position is slightly different.

Except this, there is no difference between the two. It is permitted to make only minor modifications to the extent of incorporating the name, etc. This is normally required to be carried out by an independent third party and is paid separately by the buyer to the third party. The grant of licence is a right to use the software, with a legal right of possession and effective control, allowing another person purchaser to use the goods software.

This is done by copying the original software and then given possession and control to the buyer. The moment this is copied for Sale, it becomes goods, as defined by the Supreme Court of India. The position for the developer of the software and the dealer is the same. This portion being in List-II, i. Normally the pre-installation, installation, modifications and successful commencement of use of software, etc.

As held by the Supreme Court para 4. Hence, the sale price cannot be disintegrated for the purpose of Service Tax. But, there has to be suitable amendment in the Valuation Rules and a basic clarification in the definition and the scope of the service, to tax services part only under the Service Tax and not the goods part, as this is not permitted under the Constitution of India.

However, the client has now deducted TDS since service tax was levied. The invoice was raised in Feb 09 and payment has been released in June , so the TDS deducted will be for MVAT was paid in time.

What coud be done in this case? Your are not logged in. 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.

Dept of Treasury from , the court identified cloud computing products separate from prewritten computer software as different entities for taxability purposes. In other words, Software-as-a-Service as a cloud-computing program that is only accessed remotely without delivery of a tangible media and does not include the user taking possession of the program is not subject to sales or use tax. Where can you go to learn more about why Michigan does not require sales tax on Software-as-a-Service SaaS?

Michigan Treasury Update Vol. Minnesota likely does not require sales tax on Software-as-a-Service. In this scenario, it is considered a nontaxable service. Also, in a form of unofficial department guidance, Minnesota responded to a survey in stating that Software-as-a-Service is not subject to sales tax so long as the seller fully owns and operates the applications; the software is accessed via the Internet by the customers; the software is not transferred to the customer; the customer does not have the right to download, copy, or modify the software; and, the seller bills the customers on a per-use basis or a monthly or annual fee basis.

Where can you go to learn more about why Minnesota does not require sales tax on Software-as-a-Service SaaS? Minnesota R Missouri does not require sales tax on Software-as-a-Service. Missouri does not require sales tax on Software-as-a-Service, but the service provider must pay sales tax on any tangible personal property used to provide the service.

Where can you go to learn more about why Missouri does not require sales tax on Software-as-a-Service SaaS? Mississippi requires sales tax on Software-as-a-Service though a software license agreement might be taxable. However, if computer software is transmitted by the internet to a destination outside of Mississippi and the first use of the software occurs outside of Mississippi, then the software is not taxable.

Where can you go to learn more about why Mississippi requires sales tax on Software-as-a-Service SaaS? Miss Code Ann Sec. You can find the specific statute for the out-of-state exemption in Miss Code Ann Sec. Nebraska generally does not require sales tax on Software-as-a-Service. Nebraska does not explicitly define Software-as-a-Service or Cloud Computing in its statutes; however, it does define computer software. Nebraska defines computer software which is taxable as a sequence of instructions that directs the computer to process either digital or analog data.

Since Software-as-a-Service directs a computer that is not owned by the end-user to process digital or analog data, Software-as-a-Service would not fit under the definition of computer software. Businesses should note that software consulting and implementation fees are taxable in Nebraska and if a material portion of the Software-as-a-Service subscription is for consulting or implementation, it could make the entire transaction taxable.

Special consideration also needs to be given for certain web-based software solutions that involve the protection of computer systems, software, or data against unauthorized access or intrusion. Where can you go to learn more about why Nebraska does not require sales tax on Software-as-a-Service SaaS?

See Reg for the definition of software. New Jersey generally does not require sales tax on Software-as-a-Service. So long as the software is hosted in the cloud and not delivered to the end-user then it does not fit the definition of taxable personal property.

The software is hosted by a seller that owns, operates, and maintains the software. The seller houses the software on its own servers. Customers access the software via the Internet. The software is not transferred to the customer, nor does the customer have the right to download, copy, or modify the software.

New Mexico generally requires sales tax on Software-as-a-Service and any software delivered electronically. New Mexico does not have a statute which explicitly defines Software-as-a-Service, however both canned and custom software is considered taxable, and professional services to create software are taxable in New Mexico.

Therefore, Software-as-a-Service is subject to gross receipts tax in New Mexico. You need to pay special attention to how the user license is handled because if the license is transferred to the end-user it could constitute a sale of property in addition to the sale of tangible personal property which means the end-user could also be subject to property tax.

New Mexico Admin. Code tit. Nevada does not require sales tax on Software-as-a-Service. In Nevada, software that is delivered electronically is not considered tangible personal property and is therefore not subject to sales tax.

Certain services are taxable in Nevada, however, Nevada does not explicitly define Software-as-a-Service as a taxable service. Therefore, Software-as-a-Service is not subject to sales tax in Nevada.

Where can you go to learn more about why Nevada does not require sales tax on Software-as-a-Service SaaS? Nevada Admin. Nevada Rev. New York requires sales tax on Software-as-a-Service. Although New York has not explicitly defined Software-as-a-Service in its statutes, the Department of Taxation and Finance has issued various advisory opinions indicating that software accessed remotely is taxable.

In contrast, readers should note that computing power is considered a non-taxable service in New York and therefore not subject to sales tax. Computing power refers to a specific array of a processor, memory and storage, and is often involved when customers purchase computer instances in order to run their own software applications. This tax bulletin published by New York explains how sales tax applies to sales of computer software and related services.

This advisory opinion clarifies that cloud computing is not subject to sales tax. North Carolina generally does not require sales tax on Software-as-a-Service. North Carolina does not impose sales or use tax on charges for such services.

S Sec. North Carolina Tax Bullet Clarifies that software-as-a-service is not generally taxable. North Carolina also provides more clarity on the taxability of Software as a Service in Private Letter Ruling North Dakota likely does not require sales tax on Software-as-a-Service.

North Dakota does not expressly define Software-as-a-Service in its statutes and does not explicitly provide an exemption for Software-as-a-Service. That being said, North Dakota does tax computer software. We do not tax services which require a fee or subscription to access or use.

North Dakota defines computer software and what would be considered taxable in Ohio requires sales tax on Software-as-a-Service when used in business, but generally does not require sales tax on Software-as-a-Service when intended for personal use. Why does Ohio require sales tax on Software-as-a-Service for business use and not for personal use?

Readers should also note that prewritten software is always subject to sales tax in Ohio, and custom software for use in business is subject to sales tax in Ohio. Where can you go to learn more about why Ohio requires sales tax on Software-as-a-Service for business use and not for personal use? Ohio AC defines computer services, computer programming, and what is considered a business function. Ohio RC Oklahoma does not require sales tax on Software-as-a-Service. Oklahoma only requires sales tax on specified services, and Software-as-a-Service is not specified as a taxable service by Oklahoma.

Additionally, Oklahoma does not require sales tax on custom or prewritten computer software delivered electronically, so it is safe to say that Software-as-a-Service is not subject to sales tax in Oklahoma. Where can you go to learn more about why Oklahoma does not require sales tax on Software-as-a-Service SaaS?

If a portion of users are located within Pennsylvania, and a portion of users are located outside of Pennsylvania, an exemption may apply for the users who are located outside of Pennsylvania.

Finally, SaaS investments can greatly enhance the capabilities and competitiveness of a business; a minor misstep in regard to sales and use tax may erode returns realized by these investments.

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