Tax on IT services depends on both input and output

EXPERT EYE

The levy of service tax on business auxiliary services is not without controversies. The main reason being there are too many types of services, which fall within the realm of business or marginally touch business.

An auxiliary service is conceptually what helps business. Information technology (IT) services, therefore, attract attention first since most works these days need a computer. The issue is whether IT service should attract the service tax under the heading of business auxiliary service.Three elements define auxiliary services:

Procurement of goods or services, which are inputs for the client

Production of goods on behalf of the client

Provision of service on behalf of the client

We have to examine if IT services fall under the third category""provision of service on behalf of the client.

As per the definition of business auxiliary services, IT services do not fall with its purview.

That, however, is not the end of the controversy. In the explanation appended to the definition in the Act itself, it has been clarified that IT service means any service in relation to designing, developing or maintaining computer software or computerised data processing or system networking or any other service primarily in relation to operation of computer systems.

In this regard, it has also been clarified by circulars issued by the Central Board of Excise and Customs that only if the output service provided by a service provider is in the nature of the above operations, will such exclusion operate""that is to say, it will not attract service tax.

The mere fact that a personal computer or a laptop has been used to provide the service does not, ipso facto, make the service an information technology service.

Similarly, the fact that the IT service has been used by the service provider as an input does not automatically make the output service an IT service. The output has to be in relation to a computer system. Or in other words, not only the input, but also the output has to be a computer system.

Therefore, in such cases, individual service has to be examined with reference to the explanation provided by the definition of business auxiliary service and only such output services, which qualify to be IT services in terms of the said explanation, shall remain excluded from taxable service under the heading business auxiliary service.

This makes the issue in relation to some individual services an open question. In each case, the matter has to be examined in view of the explanation in the definition.

In this context, a typical example is that of personalisation of smart card, which is used in mobile phones, driving license, registration certificate, other identity cards, access control cards, etc. It envisages designing and developing the software called operating system, which is programmed in the chip of the smart cards.

Thus, the programmed smart cards are computerised data processed as per the specific requirement of a specific customer, for operation of computer system.

Only through the computer system the programmed (with operating system) and personalised (with data processing) smart card will operate. The smart card is a part of the collective term "chip card", which denotes all plastic cards that have an integrated circuit.

A distinction is made between different types of cards, depending on the design of this circuit and the card's features. The chip module is the heart of the card and gives it its personality. The module defines what and how much the card is to perform.

A general distinction is made between memory cards and microprocessor cards (smart cards). But in any case personalisation of smart card is classified as an IT service.

The conclusion is that not only the input but also the output has to be a computer system for the service to be an IT service. The nature of personalisation of smart card activity is purely in the nature of IT service. This example gives an idea of how to examine an individual case in the light of the definition, with exclusion as a part of the definition.

The author is a former member of Central Board of Excise & Customs

smukher2000@yahoo.com