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At a time when partners were getting ready to grid their belts, and find ways
and means to weather the slowdown, they have been hit by a double whammy. First,
there was the ambiguous taxation on software-which most partners were unaware of
or thought did not apply to them. And if that was not enough, they have been
asked by the government to disclose details of the rebates they have enjoyed on
the hardware business in the last four years.
In the software taxation case, most dealers, distributors and even vendors
for that matter do not know what the nature of tax applicable is for various
forms of software delivery mechanisms. And though various associations have been
making representations to different government bodies, there is no clarity on
the issue as yet.
For over 20 years now, dealers have been paying VAT, which was earlier called
sales tax, on packaged software and later started paying service tax for
software maintenance, subscription and other services.
On May 16, 2008, a new category of taxes for the services provided in
relation to information technology software for the use in the course, or
furtherance, of business or commerce (Section 65 (105) (ZZZZe) ) was included in
the list of taxable services. As a result, software dealers were asked to charge
service tax on the basic price and then charge VAT on the basic price + service
tax. The reason this worried partners is because they were operating on margins
of two to three percent.
In most cases, customers would deduct the tax from source and pay the dealers
a lower value post TDS, which the dealer then had to reclaim from the
government, which in turn blocked their working capital. Additionally, customers
were unwilling to pay the increased value for the software, after the dealers
factored in the various taxes to the software's end-user price. Partners were
literally caught between the devil and the deep sea.
To compound this issue, dealers have now been asked to pay 12.36 percent of
service tax for the back-end payments that they receive from vendors, since
2004. Most dealers don't know why they should be taxed for rebates in the first
place, because it is an incentive for achieving targets and not a service they
provide.
There is a lot of confusion in the channel, and in our story for the
fortnight, DQ Channels has tried to shed some light on this issue, by speaking
to legal experts in this matter as well. ISODA is planning to file a legal
petition to get some clarity on the software taxation issue, while in Tamil Nadu,
Confed has decided to suspend business with vendors, till the latter come out in
support of the channel in this regard.
It is clearly a time for partners to rally together and find a way to gain
better understanding on these issues before taking dramatic steps. Taking the
legal route is an option, but then the partners need to accept the fact that the
ruling could go against them and they would have to abide by the court's
judgement. So it might be a good idea to get all their documentations in place
as quickly as is possible and gather as much information about the various
taxation norms as well.
Vinita Bhatia
vinitavs@cybermedia.co.in Page(s) 1
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