Even though the tax department has set aside a clutch of orders sent to IT companies reversing their tax exemptions in respect of IT/IT-enabled services (IT/ITes) provided to clients abroad and also slapping service tax and penalty on them, tax experts said the “technical issue” could linger. Under the Place of Supply Rules — which were applicable to service tax earlier and hold good for the GST now — in case goods are provided to a service provider, the place of supply of the service is where the goods are located and the tax needs to be paid there. In practical terms, the problem arises for Indian IT companies providing IT/ITes to firms abroad because they often use the base software made available by the client abroad to do the repair/upgrade and subsequently export the version. Such transactions remain export of service and hence exempt from service tax/GST if the Indian firm has online access to the foreign buyer’s server. If, on the other hand, the Indian company download the base software for repair/upgrade, then it is akin to it being supplied a good by the foreign client and so the place of supply of (the services) becomes India attracting tax liability in the country.
In TCS versus State of Andhra Pradesh (2005), the Supreme Court had held that software is a “good” and hence transactions relating thereto could only be construed as sale of good.
Following reports that the indirect tax department had sent notices to dozens of IT companies, seeking return of export benefits (tax refunds) claimed by them between 2012-2016 on software provided to clients outside the country and demanding 15% service tax along with fines, the government clarified on Tuesday, “in a subsequent development, the commissioner (Appeals) set aside the orders of the lower adjudicating authority where refund was disallowed and has also upheld the orders where refund had been granted. Thus, the apprehensions expressed in those sections of the press about the negative effects on the software industry was without basis.”
The clarification was actually an outcome of the IT companies under the banner of Nasscom raising the issue of tax demand with finance minister Arun Jaitley in the pre-Budget consultations on Monday.
According to industry experts, while branded software is treated as “good” (merchandise), customised software include the service element of customisation. But the determination of customisation in this context will hinge on the contract terms. “The tax issue with regard to IT companies providing services to clients outside India is a technical, rather than a policy-related one. The solution should be fact-based, depending on the specifics of each case,” a tax expert said, requesting anonymity. Anyway, since GST also goes by the Place of Supply Rules, the issue will remain unless it is settled with legal amendments/tribunal rulings. The breather given by the finance ministry therefore doesn’t give a lasting relief to the IT firms, which had said the tax notices would make their businesses, already on wafer thin margins, non-viable.
“There are quite a few tech service providers across locations who have been struggling to get refunds and any direction to the refund authorities to consider the matter in proper technical grounds and then decide, would be greatly appreciated by business. There is a need to support exporters of services, who have in any case been grappling with increased compliance requirements, by making the refund process painless,” said MS Mani, partner GST, Deloitte India.