According to Taxman in India, from 1st June 2008 (after this year Union Budget was passed) a licensed software like Adobe Photoshop or Microsoft Office is both a Service and a Product. While world over taxes is being simplified, streamlined and modernized keeping pace with technology – in India our Finance Ministry has proven its fondness for complicating existing laws and getting into legal word tangles. This is in spite of record tax collections in the last few years, this year TDS (withholding tax) collection was up by a whopping 60% from last year.
While the change of classification of software may seem insignificant it has a real impact on the tax that a consumer/business is charged while buying a software package. Earlier all Packaged Software/License were treated as a sale of a product and charged VAT @ 4% to 12% (varied by state). Now all software are treated as services as well. It is not reclassified from Product to Service but classified to be both – strange is India’s tax laws!. The industry is suffering for the last few weeks with all major dealers and distributors waiting for some clarity from the government as this change will result in a tax of 24% on licensed (legal) software, which is absurd. In India Service Tax is Central (Federal) subject, VAT is State subject – so both don’t want to clarify this situation.
This week I couldn’t buy a software that I needed because of this issue. My regular dealer refused to give me a quotation for few products that I wanted because of this legal mess. He said in his 25 years of being in the business this is the first time he has stopped billing for over 3 weeks. What is even more strange is that none of the software industry bodies is vocally raising this issue to the government – may be they feel the government has no ears to serious issues like these, they are busy listening to the daily threats from the left parties :-)