Retrospective service tax on software from July '04

The revenue department has decided to levy service tax on repair and maintenance of software with retrospective effect from July 9, 2004.

In an internal communication, all its field formations have been told to levy the tax from this date.

The decision to collect the tax from a backdate has been taken by the Central Board of Excise and Customs (CBEC) on the ground that it had, on that date, withdrawn the notification which provided exemption to computers, computer software and computer peripherals from service tax.

The original exemption notification had been issued by CBEC on August 21, 2003. Computer software being a part of computer systems was covered under this notification.

Service tax expert J K Mittal contends that the move would create confusion and lead to litigation.

"This decision is not appropriate because the exemption was not a sole ground (but one of the four) to clarify that maintenance of software is not chargeable service tax," he said.

Mittal pointed out that CBEC had in October 2005 clarified, superseding all its earlier clarifications and circulars, that software, being a good, any service in relation to its maintenance or repair or servicing would attract service tax.

The move to now collect the tax from July 2004 was against the spirit of the clarification. The October 2005 clarification was issued on the basis of a November 2004 judgment of the Supreme Court in a case involving Tata Consultancy Services where it concluded that branded software was a good.