1 Three major Problems for Software Product Companies. 2 Removing Confusion on Goods and Service tax for Software Products in Indirect tax regime

Transcription

1 1 i S P I R T. i n Note on Aligning Tax Policy for Software Products in Digital Age 1 Three major Problems for Software Product Companies ispirt has been bringing to notice of the Government of India the major concerns of Software Product Industry, mostly from point of view of: a) Easing of Doing Business (easing the tax regime here) without changes in tax rate or tax collected by Government of India b) Promote trade of Indian Software Products thus help Indian Software Product Industry There are 3 main areas that require attention to remove friction and promote software products industry and also boost the digital economy are as follow: 1. Removing Confusion on Goods and Service tax for Software Product 2. Modification of Royalty clause introduced by Finance Bill 2012 (Direct Tax) 3. Bringing B2C sales of a software product online by a sellers of foreign origin into tax net. 2 Removing Confusion on Goods and Service tax for Software Products in Indirect tax regime The indirect taxation on Software Product in India is one of the most complex and a real hurdle in the way of promoting the Software Product Industry at present, amounting to double taxation of the Software products in many instances. 2.1 Issue of Double Taxation on Software Products Normally a trade transaction can be either a good or a Service. However, the Software Product is the only product that is subject to a dual treatment under tax regime both as goods and as Service. A Packaged Software product when sold on a media (CD, DVD etc) is taxed for Excise Duty + VAT. Same product when sold online (downloaded) is treated as a Service and charged service tax and the states charge VAT even when it is taxed by centre as a Service. There are no other goods which are treated as services also and there is no other service that is subject to pay VAT. This confusion will also remain in GST as Products have a different value chain than Services. 2.2 The cause of this duality between goods v/s services Need for a Tariff code (HS Code) for Digital Goods. The future lies with recognition of Digital Goods as an international standard and WTO involvement in the accepting these principles.

2 In the interim, India can adopt a workable solution. At present, all that is not covered under HS Code classification as given below (mostly software/digital goods downloaded online or SaaS Software) is treated as a service, despite the fact that packaged software and SaaS is the same whether traded on a media or online as a medium. HS Code Item Description Documents of title conveying the right to use Information Technology software Hard copy (printed) of computer software (PUK Card) Information technology software on Media Source: DGFT HS Code Database and CBEC A HS code classification for following categories can be issued using the last 2 digits (first 6 Digits being defined under international system) Or Until a global harmonious classification emerges a codes may be defined under chapter 98/99. Following category of definition will solve the issues of Digital Goods (i) (ii) (iii) (iv) Pre-packaged software (Software Product) downloads Software Product supplied as S-a-a-S model Sale of Right to use digital goods/software products Digital Goods other than Pre-packaged Software Some countries have created a HS code under 98/99 for Downloaded Software e.g. China has a code under for Computer software, not including software hardwired or integrated in products. Similarly some countries are using 9916 as a code for pre-packaged software. 2.3 Solutions/Recommendations The solution to the problem lies in: a) Modify HS code classifications Or adopt an alternate/supplementary classification that leads to clear definition and categorization of Software Product and Digital goods e.g. Software Products downloaded online can be allocated a HS Code in chapter 99 (national use) as described above. b) Providing status of goods to Software Products (intangible goods) by a special notification/circular/guidelines thus giving special focus to the Digital Economy in tax policy. A additional note for definition on Digital Goods and Digital Services is attached. 2 i S P I R T. i n

3 3 Software Product Sales in not Royalty Income 3.1 The Issue One of the main concerns of the Software Product industry has been 10% TDS on sale of Software, introduced in Finance bill Under this provision the sale of software is treated as royalty income and subject to TDS deducted at source by the buyer of Software. The genesis of this provision is to bring foreign entities in ambit of withholding tax on their income from sales of software in India. However this has been applied to also Indian entities selling software to other Indian entities. This has caused lot of hardship to the Indian Software Product companies. Impact The provision is detrimental to Indian Software product companies whose business income is any way taxed at financial year end is also subject to TDS. Software Products carry all attributes of being Goods, except that they are intangible Goods. There are no other Product/Goods subject to a TDS. Imagine the situation it could create if Sale of any other goods in other industry sectors was subject TDS. 3.2 Why is this important? At deeper level the cause again is that the tax law does not distinguish Software as a Product and Service based on trade practice attributes and does not take Digital Trade into consideration. A general assumption of the policy makers in past has been that a) Software is only imported b) Software is only a service India today has all the prowess to make its own Software products with its mature IT Industry. World is moving towards pre-packaged S\W products in all industry verticals. A Software product Industry has emerged in India. Just like we promoted Software Services export industry, it is the need of time to promote the Software Product Industry now and provided with a congenial environment. Most of the players in this emerging Industry are SMEs and a number of product based startups are emerging. ispirt expects this number to be large enough in next 5 to10 years and generate employment and National wealth. 3 i S P I R T. i n

4 Being largely a SME industry the TDS causes 3 major hassles: a) Causes huge friction in trade b) It reduces the much needed working capital in hand c) It creates huge administrative burden (which may not be a concern for large players) Software Products will form an important part of a Digital Economy. Digital economy will have to consider a broader classification of Digital Goods and Digital Services. We have seen in past, representations have been made by some quarters to reduce this rate of TDS from 10% to 2% on Software Sales. Reducing rate of TDS from 10% to 2% is in fact going to be detrimental to the SMEs as the administrative hassles around the same will continue to exist. We had proposed completely removing TDS on Software Product sold by an entity registered in India. a) Solution and Recommendations a) Repeal the provisions of finance act 2012 with respect to TDS on Software by striking off the explanations introduced in Income Tax Finance Act section 9(1)(vi). OR Provide exception to sales of Software Products by Indian entities and limit the provision of finance act 2012 only to Software sold in India by foreign entities (for withholding tax being the main line of argument). a) Amend notification CBDT Notification NO. 21/2012 [F.No.142/10/2012- SO(TPL)] S.O. 1323(E), DATED To exempt sales of any software by an Indian Entity from TDS and limit this to sales by foreign entities only. b) Introduce a separate form for such withholding tax being deducted from foreign entities instead of mixing this with the TDS provisions for domestic trade and business. Note: Although the withholding tax provision also does not work in practice as the TDS so done from foreign entities is paid by end-buyer and hence becomes an indirect tax thereby also increasing the cost to consumer. This way it also works counter to other policy measures that focus on reducing the cost of Software import. b) Long term - Bring in suitable amendment/exceptions to Royalty definition to accommodate Indian Software product industry, by introducing a distinction between Copyright and Copy righted articles to help digital economies which will be overwhelmed by such articles. 4 i S P I R T. i n

5 1 Download from Foreign S/w Product companies into the tax net > Level playing field A large number of International Software Products are downloaded from directly from websites owned by foreign Software Product Companies or from foreign based Software trading companies. There is no control on Software products sold or traded through such foreign based websites using international payment gateways and credit/debit card systems. This is being done by both cases B2C products and B2B products as well. In B2B business transaction Indian companies are legally bound to pay service tax and VAT on reverse charge basis. However, the compliance rate is not supposed to be very high for such transactions. These transactions shall grow further as the Internet Proliferation increase and India transforms into a Digital Economy. Indian Software Product companies with similar products sold as online downloads have to face a double taxation of Service Tax + VAT + TDS on sale of Software and are devoid of a level playing field. This results in following problems for the Software Product Industry: a) Indian Software Product companies face unhealthy competition b) A large portion of trade can go unaccounted thereby leading loss of tax In international forums like OECD this issue is being discussed at a very serious note as it is causing Base erosion and Profit Split. EU has already come out starting 2015 for taxing products sold online by foreign entity in to an EU country. A government intervention is needed to correct this market force imbalance. 1.1 Solutions/Recommendations The main requirement in this case is level playing field to Indian Software Product Companies. Once straight solution to promote indigenous B2C software product industry is to bring it at par with International counterpart on indirect taxation front, by exempting all indirect tax on online downloadable packaged software products for a period of next 5 to 10 years. As a result online trade will be encouraged. This will not only promote the software product industry but also boost the Digital India movement. 5 i S P I R T. i n

6 Additionally/Alternatively a) B2C transaction above a threshold to be taxed (tracking of such foreign currency transaction from credit/debit cards and bank accounts for purchase of software is possible as all credit/debit cards are issued by an Indian Bank and all payments arising from Indian banks are of concern for us a country). b) Multilateral Foreign trade agreements can be explored in long term It is recommended to take this issue in a special inter-ministerial working group and evolve a suitable approach both to protect and promote the Software Product Industry by providing level playing field as well provide favourable environment to transformation into a Digital Economy. 6 i S P I R T. i n