GST and Taxation of Intangibles
One of the major taxation problems in India is the taxation on intangible products and services. These include Intellectual property (IP) such as patents, copyrights and trade secrets and software, software services such as SAAS.
This problem is global and not specific to India. In most VAT/GST countries, the characterization of intangibles is full of ambiguity and India is no exception to this. In India, the levy of indirect taxes (VAT/Service Tax) has always been a dispute and many disputes are far from getting settled.
Current Regime
Under the current Tax regime in India, the intangibles can be taxed under service tax or VAT depending on whether the transaction qualifies to be a good or service. However, the problem arises when the transaction does not fall into any of these categories and there is ambiguity of charging service tax by the Union government and VAT by respective state governments on intangibles. This issue compounds due to the fact that while centre can charge service tax, state charge VAT.
Progress / Reforms so Far
The Supreme Court had given a landmark judgement in TCS case after which the state governments have been levying the tax on VAT, canned / branded / packaged software. However, most tangibles including IPR, designing, upgrading, adapting, implementing activities etc. are still considered services for the purpose of taxation. This has led to dual taxation of intangibles.
Under GST
Since intangibles make a substantial part of net worth of many individuals; both Union and state governments would like to grab this low hanging fruit. This tug of war is expected to come to at an end with GST whereby both Union and States will be allowed to collect tax equally on same transaction. Further, the GST law has put intangible products / property in category of services because most such transactions include licensing/non-exclusive rights to use/exploit commercially. Further, activities related to IT, software etc. have been strictly classified as service in GST law.
