Service tax on IT services
The Information Technology or IT industry is one of the largest and most important service industries in India, employing millions of Indians. IT services and services provided in connection with information technology software are taxable under the Service Tax Act in India. In this article, we will take a detailed look at the applicability of service tax on IT services.
Note: From 1 July 2017 IT services are subject to GST. Click here to view the GST rate for IT services.
IT services taxable in India
The following services related to the IT industry in India are taxable under the Service Tax Regulations:
Development of information technology software;
Adaptation, updating, enhancement, implementation and other similar services related to information technology software;
Providing advice, consultation and assistance in matters related to information technology software, including conducting feasibility studies for system implementation, specifications for database design, guidance and assistance during the start-up phase of a new system, specifications for database security, consulting on proprietary information technology software;
Granting the right to use information technology software for commercial use, including the right to reproduce, distribute and sell the information technology software and the right to use software components to create and incorporate into other information technology software products;
Granting the right to use information technology software delivered electronically.
Information technology software is defined as a representation of instructions, data, sound or image, including source code and object code, recorded in machine-readable form and capable of being manipulated or provided with interactivity by a user using a computer or automatic data processing machine or any other device or equipment.
Further, through changes in service tax regulations, the following were also added to the information technology software services:
Adaptation, up-gradation, improvement, implementation and other similar services in relation to IT software.
Providing advice and assistance on matters relating to IT software, including:
Conducting system implementation feasibility studies. Providing specifications for database design. Providing advice and assistance during the start-up phase of a new system. Providing specifications for database security or providing advice on proprietary IT software.
Obtaining the right to use:
IT software for commercial use including the right to reproduce, distribute and sell. Software components for creation and inclusion in other IT software products IT software delivered electronically.
Application of VAT or service tax on software
Packaged software that is sold as an off-the-shelf product is treated as a sale of goods subject to VAT and excise duty. Packaged software is subject to excise duty on MRP valuation, subject to a reduction of 15% MRP. i.e., Excise duty (and corresponding CVD) is payable on the value which will be 85% of the MRP printed on the software.
The applicability of VAT or service tax on the software will depend on the determination of whether the transaction results in a “transfer of the right to use” the underlying goods. If possession and actual control of the underlying goods is transferred to the customer, VAT will apply.
Therefore, based on the specific nature of the transaction, it is best to consult a chartered accountant.
Service tax on the export of IT services
In most cases, service tax is not applicable on exports of IT services from India. However, in some cases, service tax may be applicable based on the rules for the place of supply of services. Therefore, it is again best to consult a service tax expert to find out whether the service provided is classified as an export service, thus exempt from service tax.
Service Export Scheme from India
Service exporters involved in the export of IT services from India are eligible for duty credit under the Export of Services from India programe. Therefore, it is recommended that all exporters of IT services obtain an Import Export Code or IE Code before starting the export of IT services – to be eligible for Customs Credit Receipts.
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