OFF-THE-SHELF SOFTWARE USERS TO PAY SALES TAX

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Causing ripples of apprehension in the IT industry, the Supreme Court has ruled that off-the-shelf computer software is liable to tax under the provisions of the Sales Tax Act.

The verdict was in response to a petition filed by software major Tata Consultancy Services, challenging an Andhra Pradesh High Court order that permitted levy of sales tax on computed software, classifying it as "goods" under the Sales Tax Act.

The ruling will, at best, be a shot in the arm for state revenues, but is unlikely to adversely impact the software industry. The apex court's directive relates only to off-the-shelf software, which comprises a minuscule portion of the software solutions market.

The software market is dominated by customised solutions. For consumers, the price of software will increase, especially in states where sales tax has not been imposed on software so far.

A five-judge bench comprising Justice N Santosh Hegde, Justice SN Variava, Justice BP Singh, Justice HK Sema and Justice SB Sinha upheld the Andhra Pradesh HC order. The apex court held that when a person goes to buy a CD containing the software, he does not pay only for the CD, but for the software contained in the CD.

Appearing for TCS, senior advocate Soli J Sorabjee and advocate Sanjib Sen contended that software is nothing but knowledge and hence, could not be categorised as "goods".

However, it is the contention of the state of Andhra Pradesh, which levied the sales tax, that off-the-shelf software cannot be treated as "knowledge", making it liable for sales tax under the Act.

Reacting to the development, Nasscom president Kiran Karnik said the IT association is yet to obtain a copy of the judgement. Hence, it has not yet ascertained if all kinds of software will be liable to sales tax, or whether it will be restricted to "off-the-shelf" software.

Mr Karnik said, "We are aware of the move to integrate the tax on all goods and services, and the movement towards VAT. In this context, the long-range scenario will not be affected by this judgement. Immediately, however, it may impact the price paid by the user, which could affect the speed of penetration of PCs in the country and also help proliferation of pirated software."

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