cutting through complexity1

Taxation of Services.Overlap in Centre -State division oftaxing powers

Sachin Menon

Head of Indirect Taxation, KPMG, India

07 December 2012

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Contents

The overlapIssues

- Intellectual Property Rights

- Information TechnologySoftware

- Works contracts/ hirepurchase

GST

- Solution?

Overlap in powers of state and central governments

Services

-The Constitution of India givesexclusive authority to CentralGovernment to tax 'services'and 'manufacture of goods'

-Definition of service coversintangible goods as well ascontracts involving materials andlabour

Intangibhgoods/

contractsof sale

involvinggoods &services

Sale of Goods

-The Constitution of India givesexclusive authority to StateGovernment to tax 'sale ofgoods'

-Sale of goods is defined underrespective state VAT Act - alsocovers intangible goods as wellas contracts involving materialsand labour commonly known asdeemed sale)

Works Contract Transfer of rightto use

©2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Hire purchase

Issues: Intellectual Property Rights (IPR)

StateLicencing of IPR

Double TaxationCentre

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XTaxation

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Service Tax: Declared service includes 'temporary transfer or permitting the use or eniovmentof anv IPR'

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VAT: Transfer of right to use goods is covered under the definition of sale. Goods includesoftware, Patents and Trade Marks.

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Impact of BSNL Judgement: Is licensing subject to State VAT? (Decision of MaharashtraTribunal in case of Smoking Jones Pizza)

Definition of service excludes deemed sales transactions and includes the same asdeclared service - The final impact?

Clarification issued under Taxation of Service - A n Education Guide by CBEC

©2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Issues: Licensing of Software

Taxation

Issues

Service Tax: Definition of Service includes development, design,programming, customization, adaptation, upgradation, enhancement,implementation of information technology software

VAT: Software license included as goods in many state VAT schedules orcovered under transfer of right to use goods

Excise Duty: Preparation of Packaged software subject to excise duty

Programming and providing of computer software is specifically covered underVAT schedule of goods in the state of Karnataka

Software licenses are covered in VAT schedule of goods in many states

Whether software licensing is subject to service tax or state VAT or both?

Software AMC contracts are considered as service, deemed sale or both?

Taxability of Paper License (is it goods or services).

Levy of Central Excise Duty on sale of packaged software

Treatment of Import of packaged software licenses through the Net

Whether Customisation of Software are Composite Contracts from the VATpoint of view?

©2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Issues: Works Contract/ Hire purchase involving goods & service

Taxation: Valuation

Service Tax is levied on:service portion in execution of a works contractS transfer of goods by hiring, leasing and

licensing without transfer of right to useis levied on:

transfer of property in goods involved in theexecution of works contractdelivery of goods on hire purchase

Issues

Valuation of service portion and value of goodsis always disputed.Ambiguity arises from contradicting Laws andconflicting interpretation by the taxadministrators

©2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Other miscellaneous issues

echarge Coupon Voucher

Franchisee Fees

Activation / Installation Fees for DTH JLeasing of goods: Thin line of difference betweenVAT and service tax

Import of software in relation to goods imported fromoutside India

Entertainment Tax and Service tax: DTH Subscriptionfees / Hotel etc.

© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Complex laws gives rise to Complex structures

The tax liability on such transaction can be

substantial and can impact the company's financiais

significantly

Businesses shall take extra care while entering into

transactions with over lapping tax implications

Possibilities of structuring /re-structuring of the

transactions to avoid future litigation

Providing adequate commercial substance and

proper documentation is the key

©2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Proposed Goods and Service Tax (GST) Regime

Broad based 'consumption tax' on goods and services

India proposes simultaneous levy of "dual GST" by State and CentralGovernment, on both goods and services

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Input credit available across goods and services at each stage

©2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Proposed Goods and Service Tax (GST) Regime

Goods and Services Tax is proposed to be implemented in India shortly

The GST proposed to bring in homogeneity in definitions and uniformplace of supply rules across India

©2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent memberfirms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. 10