Greetings from Team SA!

The Prime Minister has set up a panel to review the taxation issues relating to IT software sector. The panel has been set up under the chairmanship of former Chairman of the CBDT Shri. N. Rangachary. The other members of the panel are Ms. Anita Kapur, Director General of Income Tax, Ms. Rashmi Sahani Saxena, Director of Income Tax (Transfer Pricing) and another member from the Income Tax Department to be nominated by the Chairman.

The terms of reference of this committee are:

i)  Engage in consultations with stakeholders and related government departments to finalise the approach to Taxation of Development Centres and suggest any circulars that need to be issued.
ii) Engage in sector-wide consultations and finalise the Safe Harbour provisions announced in Budget 2010 sector-by-sector. The Committee will also suggest any necessary circulars that may need to be issued.
iii) Examine issues relating to taxation of the IT sector and suggest any clarifications that may be required.

While lauding our PM for this initiative, the natural question that arises is why not the hazy indirect taxation regime on software sector also be studied by an expert panel. The constitution of the present Committee and its terms of reference suggest that they will go only into the direct taxes aspects concerning the software industry.
The issue of double or rather triple taxation of software (excise duty, service tax and VAT) is a perennial problem for the industry. A review of various judicial pronouncements on the subject would reveal our Courts are by and large conservative while dealing with the subject of taxation. If the levy of VAT on software is challenged, the Courts have been upholding the levy by holding the software as goods. If the levy of service tax on software is challenged, the Courts have been upholding the levy of service tax, by taking cognizance of the service elements involved in the industry. While it is not disputed that software is goods, the levy of VAT would apply only when there is either transfer of title or grant of right to use. Anything falling short of such transfer of title or right to use should attract only service tax. In certain cases, there can be a combination of both sales and service also, where the portions liable to VAT and service tax respectively have to be clearly demarcated, by prescribing the method of valuation for both the levies. Due to absolute lack of clarity on the subject...

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