By SUBHASIS BANERJEE The West Bengal Finance Act 2001, has brought computer software under the tax net from 1 August 2001. This is an attempt to cope with the cash crunch without creating the basic environment for collection of tax. The basic principles of taxation (Adam Smiths canons of taxation) are absent. It is not so easy to collect revenue by just adding a new entry to the Schedule.
The canon of certainty (the tax payer should be informed on the time, amount and method of payment) is not clear and what is software is not defined in the Act. The canon of convenience is missing; people are confused as to which type of software will be taxed (only Maharashtra has specified software packages which are taxable). The canon of economy (cost of tax collection should be minimum) has never been thought of. In other words, the imposition of tax without proper clarification will become breeding grounds of litigation and may be a gold mine for the consultant.
The moot question whether software is goods or not remains unresolved. The Supreme Court has also admitted that determination of the true character of software is highly controversial having global implications and needs an authoritative pronouncement. The word software has been coined to differentiate between the computer equipment (i.e., the hardware) and the means of controlling the equipment, the latter having been termed software. Previously the standard programme supplied by the manufacturer along with the computer was known as software. But now the user or software vendor also develops software.
Software is basically of three types: system software, applications software and general purpose software. System software comprises programmes that control and support the computer system and its data processing applications. Application software is a main programme for various applications such as payroll, general accounting and sales. General purpose software provides the framework for a great number of businesses, scientific and personal applications: spreadsheet, database, computer aided design, word processing software and so on. This software is normally sold as a package. Even if it is assumed that software is a goods, the next question is whether all kinds of software, namely licensed software and customised software, are goods.
INSTRUCTIONS Software is basically a bunch of instructions operating in a logical manner. We can feel the presence of these instructions in different operating media like electricity. The basic difference between electricity and software is that we cannot store electricity but we can store software in magnetic media. Licensed software and customised software need to be analysed. Licensed software is also a bunch of instructions in module form which can be used in general namely Window-2000, Word-95, Fact, Tally, Perks etc. The owner of this software only sells the right to use this software to the licensee. The effective control over the software remains with the licensor. In the case of customised software, the systems analyst develops software modules after assessing the needs of business houses and are of no use to other business houses without any modification. The next question is whether the sale of this software can be considered sale of goods or sale of service? If it is considered a sale of goods, the question of marketability arises. Doubts may arise on whether the contract for sale of customised software can be treated as contract for work or a contract for sale.
For the purpose of sales tax we can classify the software into three categories: system software, licence software and application software. System software is required to operate a computer. This software is normally inbuilt within the computer and the price of the computer is generally inclusive of software. A car without an engine and a computer without system software have the same value. Hence system software is already taxed along with computer even prior to 1 August 2001. The problem arises when the rates of tax for the computer and software are different.
CONTROL As far as licence software is concerned, transfer of the right to use and not the transfer of property is involved. It is already decided in various courts of law that the transfer of the right to use can be taxable only when the effective control is also transferred along with the right to use.
Therefore, no sales tax is applicable on the sale of application software, which is customised by nature. At best works contract tax may be levied on such software. Section 15 of the WB Sales Tax Act 1994, defines works contract as any transfer of property in goods (whether as goods or in some other form) involved in the execution of the works contract…. A combined reading of Section 21 and 15 of the WB Sales Tax Act 1994 and Rule 70 of the WB Sales Tax Rule 1995, reveals that works contract tax will be levied on the material used in the execution of the work and there will be no tax on the labour charges. In case of development of customised software and its subsequent modification vendors charge customers only for man hour which is not taxable for the purpose of levy of works contract tax. Hence sale of customised software although is a contract for work but no works contract tax is payable as it is a pure labour contract.
For general purpose software, packages are liable to sales tax. Normally sale of this software is also associated with minor modifications, training given to employees and subsequent updating to meet the requirements of higher versions. If the modification, training and updating is a pre-condition for sale, then the vendor may be liable to charge sales tax on each activity; otherwise modification fee, training fee and updating charges will not be subject to sales tax as modification and updating is a contract for work and providing training does not amount to sale of goods. Assuming, but not admitting, that software is goods, then only the system software and general purpose software will be liable to tax. There should not be any tax on customised and licence software.