What is Service Tax on IT Services?

One of the largest and the most potential sectors in India that provides service and employment to millions of Indians is the IT Industry or the Information Technology Industry. All the services provided by the IT sector in India are liable for taxation under the Service Tax Act. In this blog, we will understand about the Service tax and its applicability in the IT Sector.

IT Services liable for taxation

The following IT services and those services which are related to the IT sector are listed below. These listed IT services are liable for taxation under the Service tax:

• Development of IT softwares
• Studying, designing, programming and analysing of IT softwares
• All the adaptation, upgradation, implementation, and enhancement services that are related to IT softwares.
• All the advice, consultancy and assistance that are provided related to IT softwares. Also, performing feasibility studies on system implementation, database design specifications, assistance for the start up phase of a newly launched system, any assistance related to proprietary IT softwares.
• Availing the Right to make use of IT for commercial exploitation like distributing, reproducing and selling IT softwares and availing the right to use components of softwares for creating other IT products.
•  Availing the right to use those IT softwares that are supplied electronically.

IT software is generally described as a depiction of data, sounds, instructions or images along with the object code and source code which is recorded in a form that is machine readable and can be manipulated and may also provide users the ability to perform interactivity. This can be done by the use of a computer or a data processing machine that is automatic or by the use of some other devices.

Also, after a few alterations in the service tax regulations, the following listed services are also added to the IT services:

• Software Development(programming, designing, studying and analysing)
• Adaptation, enhancement, implementation and up-grading services that are related to the IT sector
• Advices and assistance on IT sector related services
• Obtaining the right to use the following:
  • IT softwares for acquiring right to reproduce, sell and distribute which are a part of commercial exploitation
  • All the electronically supplied IT softwares
  • Software constituents for creating IT products or for their Inclusion in other IT products

VAT or Service Tax on Softwares

VAT is applied on those packaged softwares that are sold as store bought or off-the-shelf products. The sale of these products is treated as sales of goods and hence both VAT and Excise Duty are applicable on them. The packaged softwares are exercised on their MRP valuation which is abated at 15% of the MRP.  This means that the excise duty will be paid on 85% of the MRP that is printed on the particular packaged software.

VAT will be applied on a product depending on the results of the transaction i.e. only if the transaction result states “transfer of right to use”. In case the possessions are transferred and the transfer of control of the goods to the customer, then VAT will be applied. Whereas, in case of SAAS(Software as a Service) or cloud services, the only applicable tax is Service Tax.

The applying of either VAt or the Service Tax is a quite complex process and includes different laws and notifications.  Therefore, the best thing to do is to hire a CA as per the nature of the specific transaction.

Service Tax on Exports

Generally, no service tax is applied on the exports of IT services. But in certain cases, it is possible that service tax is applied. These conditions arise on the basis of place of provision of Service rules. It is better to consult a professional in this matter to determine whether the provided service will have to pay the service tax for export or not.

In India, all those service exports which involve in exporting of IT services have to pay duty credit scrip under the an Indian Government Scheme. This scheme is known as the Service Export from India Scheme. Therefore, it is advised to acquire an Import-Export Code or IE Code, before starting to export IT services so that you qualify for duty credit scrips.

Conclusion

As we read this blog, we came to know about a Service Tax, the services which are liable for paying this tax, its applicability and use in the IT sector. We also came to know about VAT and the Service tax that is applied on Exports of IT sector Services.