Service Tax on IT Services

The Information Technology industry or IT industry is one of the largest and prominent service sector in India providing employment to millions of Indians. IT service and service provided with respect to information technology software are taxable under service tax Act in India. In this article, we look at applicability of service tax on IT services in detail.

Note: From 1st July 2017,

GST is applicable on IT services. Click here to 1 for IT services.

IT Services Taxable in India

The following services relating to the IT industry in India are taxable under the service tax regulations:

Development of information technology software;
Study, analysis, design and programming of information technology software;
Adaptation, upgradation, enhancement, implementation and other similar services related to information technology software;
Providing advice, consultancy and assistance on matters related to information technology software, including conducting feasibility studies on implementation of a system, specification for a database design, guidance and assistance during the start up phase of a new system, specifications to secure a database, advice on proprietary information technology software;
Providing the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other information technology software products;
Providing the right to use information technology software supplied electronically.

Information technology software has been defined as representation of instruction, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment.

Further, through amendments to the service tax regulations, the following has also beed added to information technology software services:

Development (study,analysis, design and programming) of software.
Adaptation, up-gradation, enhancement, implementation and other similar services in relation to IT software.
Provision of advice and assistance on matters related to IT software, including:
- Conducting feasibility studies on the implementation of a system.
- Providing specifications for a database design.
- Providing guidance and assistance during the start up phase of a new system.
- Providing specifications to secure a database, or providing advice on proprietary IT software.
Acquiring the right to use:
- IT software for commercial exploitation including right to reproduce, distribute and sell.
- Software components for the creation of and inclusion in other IT software products
- IT software supplied electronically.

Applicability of VAT or Service Tax on Software

Packaged software that is sold as an off-the-shelf product is treated as sales of goods with VAT and Excise duty being applicable. Packaged software is excisable on MRP valuation, subject to an 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.

The applicability of VAT or Service Tax on a software will depend on determining if the transaction results in "transfer of right to use" the underlying goods. If there is a transfer of possession and effective control of the underlying goods to the customer, then VAT would be applicable. On the other hand, for software as a service (SAAS) or cloud technology service, only service tax would be applicable.

Applicability of VAT or service tax on software is a complex matter, involving various laws and notifications. Hence, its best to consult a Chartered Accountant, based on the specific nature of transaction.

Service Tax on Export of IT Services

In most cases, service tax is not applicable on export of IT services from India. However, in some cases, service tax might be applicable based on

place of provision of services rules. Hence, it is again best to consult a service tax expert to determine if the service provided is classified as an export of service, making it exempt from service tax. https://www.youtube.com/watch?v=fRV2Wp7mgJw

Service Export from India Scheme

Service exporters involved in exporting IT services from India are eligible for duty credit scrip under the

Service Export from India Scheme. Hence, it is recommended that all IT service exporters obtain an Import Export Code or IE Code, prior to starting IT services export - to be eligible for duty credit scrips.

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Frequently Asked Questions

Common questions about Service Tax on IT Services in India.

The scope of IT services covered under Service Tax in India includes development of information technology software, study, analysis, design and programming of IT software, adaptation, upgradation, enhancement, implementation and other similar services related to IT software, providing advice, consultancy and assistance on matters related to IT software, and providing the right to use IT software for commercial exploitation or supplied electronically.

No, Service Tax is not applicable on off-the-shelf packaged software. Instead, VAT (Value Added Tax) and Excise Duty are applicable on packaged software that is sold as an off-the-shelf product, as it is treated as a sale of goods.

The applicability of VAT or Service Tax on software transactions depends on determining if the transaction results in a "transfer of right to use" the underlying goods. If there is a transfer of possession and effective control of the underlying goods to the customer, then VAT would be applicable. On the other hand, for software as a service (SAAS) or cloud technology service, only Service Tax would be applicable.

In most cases, Service Tax is not applicable on export of IT services from India. However, in some cases, Service Tax might be applicable based on the place of provision of services rules. It is best to consult a Service Tax expert to determine if the service provided is classified as an export of service, making it exempt from Service Tax.

The Service Export from India Scheme is a scheme under which service exporters involved in exporting IT services from India are eligible for duty credit scrips. It is recommended that all IT service exporters obtain an Import Export Code or IE Code, prior to starting IT services export, to be eligible for duty credit scrips.

As per Service Tax regulations, Information Technology Software is defined as a representation of instruction, data, sound or image, including source code and object code, recorded in a machine-readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment.

Yes, providing the right to use software components for the creation of and inclusion in other information technology software products is considered a taxable IT service under Service Tax regulations.

The amendments to Service Tax regulations have clarified and expanded the scope of IT services covered under Service Tax. This includes explicitly mentioning services like development, adaptation, upgradation, enhancement, implementation, and advisory services related to IT software, as well as the provision of rights to use IT software or components for commercial exploitation.

No, VAT is not applicable on Software as a Service (SAAS) or cloud technology services. In such cases, only Service Tax would be applicable.

Yes, determining the applicability of VAT or Service Tax on software transactions can be a complex matter involving various laws and notifications. Hence, it is advisable to consult a Chartered Accountant or a Service Tax expert, based on the specific nature of the transaction, to ensure compliance with the relevant regulations.