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Information Technology (IT) industry has grown multi folds in last two decades in India. It is
one of the most revenue generating sector for government, job creating sector for individuals.
The taxability of Software/Solutions/Clouds has always been a litigative area because
of difficulty in its classification as goods or service due to its inherent nature of intangibility,
transfer of use, license, etc. Because of this, Software distinguishes it from other forms of
traditional goods and services. This article intends to give broad understanding of its
taxability under the current tax laws vis-à-vis proposed GST. Under the present tax laws,
Software can be liable to taxed under Service Tax, VAT, Excise Duty, Customs Duty, etc
depending on the nature of transaction whether it is sale of ‘goods’ or ‘service’ or ‘both’. The
reason for its classification is VAT on sales of goods goes to State Government & Service tax
on Service goes to Central Government and both governments being totally exclusive in
terms of taxability and revenue sharing. There are many cases in which both VAT and
Service tax & Excise Duty are applied due to no clarity from government that leads to
cascading effect of taxes i.e. a tax on tax (Double Taxation). The Intent of the transaction,
laws, judgments, must be understood thoroughly too suitably determine its classification as a
Goods or Service. The Lack of clarity in tax laws from the government till date has stopped
many software companies to enter into Indian market.

Keywords: Software, GST, Double Taxation, Custom Duty, Taxability, Excise Duty

Section 2 (ffc) of the Copyright Act, 1957 defines the expression “Computer programme” as
a set of instructions expressed in words, codes, schemes or in any other form, including a
machine readable medium, capable of causing a computer to perform a particular task or to
achieve a particular result. Thus, Software is a set of one or more computer programmes
which performs the function of the program, either by directly providing instructions to the
computer hardware or by serving as input to another piece of software.

Further, software is a intellectual property (which can be classified as a Service or Goods) as

per the Copyright Act, 1957. The sale of Software is usually coupled with and conditional to
the acceptance of a software licence agreement which gives the buyer the ‘right to use’ the
software subject to the certain terms and conditions stated in the agreement. Thus, it may be
noted that on purchasing the software, the buyer becomes the “licensee” and “not the owner
of the Software” itself. A buyer can use, abstract, consume, deliver, store, possess, transfer
and transmit such property only in consonance with the license agreement. However, he
cannot resell or exploit it commercially for his own gain or profit.


 Customized Software: Customized software is specifically created for a particular

customer to meet his specific needs in terms of coding, layout, reporting, etc. Customized
software has to be developed from the grass root level, wherein a totally new software
product is developed. It was held in various judgments that customization of pre- existing
software is “Modified Packaged Software” and not customized software.
 Packaged Software: These are commonly known as canned software, branded software,
shrink- wrap software, ready- made application software, these have features which are
commonly used by most of the customers and can’t be modified. These are sold off-the-shelf
to customers at retail outlets via physical media or can also be downloaded electronically.
The common examples of packaged software ire Tally, Norton Antivirus, Microsoft office,

Excise Duty:

Information technology software (Packaged as well as customized) is excisable goods under

the heading 8523 80 20 and tariff rate of duty is 12.5%. However, all software are exempted
under Sl. no. 27 of Notification no. 6/2006- CE dated 1.3.2006 except packaged
software which is excisable on MRP valuation basis subject to the abatement of 15% of
MRP. i.e. excise duty (and corresponding CVD) is payable on value which will be 85% of
MRP printed on the software. However, if no requirement of MRP on software, then on ED is
levied on cost.

Customs Duty:

IT Software is classified under the tariff heading 8523 80 20 of the First Schedule to Customs
Tariff Act. Rate of tariff is 12%. As per the entry, Import of software [packaged or
customized] is not subject to custom duty except which is stored on tangible media. However,
the excise duty is payable on branded (packaged or canned) software. Hence, CVD (Counter
veiling duty levied in place of excise duty) and SAD (levied in place of VAT) will be payable
on packaged software if the same would have been excisable and vatable, had it been
developed and sold in India.

The earlier regime had multiple parameters for taxation of software licenses which led to
uncertainty on whether a particular form of software license was subject to VAT or service
tax. Primarily, the determining factors were the mode of delivery of the software, and the
nature of the software contract.


Packaged or canned software is software which is sold off the shelf and it can be used by
multiple customers. The copyright in packaged software remains the property of the creator
and only a right to use is sold to the customer. Software delivered on tangible media such as a
floppy disk, CD or a DVD is considered a sale of goods, as the customer does not pay for the
CD itself but for the intellectual property in the software.


There was lesser clarity in respect of customized software, which is developed specific to the
needs of a particular user, and delivered on tangible media. Since the amendment to the
Service Tax Act was introduced the legislative intent clearly appears to have been to treat
customized software delivered on a tangible media as a service. 1 Pertinently, the service tax
Education Guide published by the CBEC also stated that customized software delivered on
tangible media under a contract for design and development of a software would be
considered as a service because the contract is pre-dominantly a contract of service.2

Having stated the above, it is difficult to rule out situations where a customized software on
tangible media could be considered as a deemed sale under Article 366(29A) of the
Constitution. Since customized software is also a good,3 the dominant nature of the contract
would be relevant in determining whether it is a sale or a service. Where the dominant
intention is to either assign the completed software to the customer or to transfer effective
control to the customer, then it may be considered as a sale. However, where the software
developer provides manpower and technical services for the development of the software,
then the nature would be that of a service because the property in the software will never

Section 65(105)(zzze), Service Tax Act. Amendment in 2008, included services in relation to “information
technology software” as a taxable service
Tax Research Unit, Central Board of Excise and Customs, Taxation of Services: An Education Guide, June 20,
2012, para 6.4.5; available at
Supreme Court in the case of Tata Consultancy Services (Supra note 3) held that ‘goods’ includes intangible
have belonged to the developer and would vest in the customer as and when and to the extent
it is developed.4 Internet downloads / access - Intangibles such as music files, movies,
games, and even software downloaded over the internet are also in the nature of ‘goods’ as
these are capable of abstraction, consumption and use and they can be transmitted,
transferred, delivered, stored, possessed etc. Further, these intangibles can also be accessed
over the internet without having to download them, such as in case of video streaming
websites, music apps or even in case of SaaS. Therefore, there could be arguments to support
their classification as either sale of goods or provision of services. Hence, evidently, the
earlier indirect tax regime was plagued with several overlaps with regard to taxation of IP


The Government of India has given incentives that required a boost in its early years, for
instance, tax holidays for export earnings for information technology and software services,
and certain units exemption from state and local taxes. However, the Thirteenth Finance
Commission (“13 FC Report”) noted that no distinction should be made between goods and
services, and consequently, Government of India should consider these factors and not treat
the digital economy differently. Emphasis on a rationalised tax structure, cashless economy
and inculcating entrepreneurial spirit calls for encouraging manufacturing and services
activities in the digital economy and giving it the support it requires.

GST laws have therefore sought to start on a clean slate as the history of indirect taxation has
multiple and complex litigation on issues relating to legislative competence and taxing
machinery. While significant correction from the erstwhile measure has been undertaken,
there continue to be ambiguities with regard to classification between a good and service,
particularly with respect to the digital economy.

Under GST, the taxable event is the supply of goods or services. Therefore, the concepts of
sale or deemed sale (as defined under the constitution) used under the VAT or central sales
tax have become obsolete. The CGST Act defines goods as “every kind of movable property
other than money and securities.”63 This definition is wide enough to include intangibles.64
Services have also been defined broadly to include, among other things, “anything other than
goods, money and securities but includes activities relating to the use of money.”65 Thus, the

. Parind Mehta, Levy of Value Added Tax on Intellectual Property Rights, available at Note_Parind-VAT_on_IPR-12Dec2015-PrintFinal-v3.pdf
distinction between mere permission to use IP and a transfer of the right to use the IP is no
longer relevant; both are considered a supply of service under GST. Furthermore, the
classification of customized software as a service has been retained under GST. The
“development, design, programming, customization, adaptation, upgradation, enhancement,
implementation of information technology software” is specifically deemed as a supply of
service under Schedule II.