The government said it has given relief to the information technology and IT-enabled services (ITeS) sector by setting aside a tax demand totalling ?10,000 crore slapped on companies. But experts said this may not be the end of the matter as the resolution would happen only at the adjudication level and tax officials could raise more such demands.
The service tax department had earlier asked about 200 companies to return export benefits claimed during 2012-2016 on software provided to clients outside India, and pay a 15% service tax along with fine. ET had reported this first in November.
While the government announcement on Tuesday made IT industry association Nasscom and some companies that were served with the demand notices rejoice, tax experts said the issue could return to haunt them.
“This clarification is not a relief for IT/ ITeS companies … (it) in turn will encourage more tax officers to issue such notices as it (clarification) specifically mentions that the matter would only be resolved subsequently at the adjudication level,” said Sachin Menon, national head, indirect tax, KPMG India.
According to the notices slapped by the service tax department, supplying software to clients outside India does not tantamount to exports of services. This is mainly because the client sends specific details of what it wants in the exported software to Indian IT firms through an email. According to the department, the email containing specifications is nothing but goods made available to the Indian firm to provide IT/ ITeS service to the foreign buyer. Therefore, it is a service.
ET had viewed four such tax notices in which companies were asked to pay tax. “I would have expected the department to clarify its stand on the issue raised in the show cause notice and instruct the field formations to adjudicate dropping the demand immediately. The issue will continue to haunt IT/ITeS companies even under the GST regime where they have to predeposit about 10% of the amount demanded by the tax authorities, for admitting an appeal,” said Menon.
Tax experts said the clarification is also silent on the pre-deposit liability of the exporter against such demands.
ET reported that the tax department had made the demand based on the ‘place of supply’ provision. Under taxation laws, tax is paid at the place where the supply is made. While this is easy to determine in the case of goods, with services it is tough, experts said.