Software servicing will soon attract tax

Seeking professional help to fix a software bug is set to become an expensive jot. The government is set to bring maintenance, repair and servicing of all computer software under the service tax net. The revenue department today informed the industry chambers of its intention to levy tax on this service. A circular to this effect would be issued soon after consultation with the industry.

At present, maintenance and repair of software products, branded or otherwise, does not attract service tax. A revenue department notification of August 21, ’03, had exempted the maintenance or repair of computers, computer systems or computer peripherals from tax.

The change in position follows a Supreme Court ruling last year in the case of Tata Consultancy Services where the apex court said that sales tax would have to be paid on off-the-shelf software products. The apex court had upheld an Andhra Pradesh HC order classifying such software as “goods” under the Sales Tax Act.

More specifically, SC had said that software and the media that holds it cannot be split. Software is transferred in a floppy disk or CD, and sold like a branded product. Where it was an unbranded or customised software, the supplier needed to use a media to transfer the intellectual property and upload it on the customer’s system.

The revenue department has taken advantage of this ruling which classifies software as goods to bring repair and maintenance under the purview of the 10.2% service tax levy. The tax on software maintenance would prove to be a growing stream of service tax revenue given the rising penetration of computers in homes.