Is Computer Software a Good or a Service?
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AI Summary
- Under GST, computer software is classified as either normal software or specific software for tax purposes.
- Normal software refers to pre-designed, off-the-shelf software supplied via any medium, such as a CD-ROM or encryption key, and is treated as a supply of goods.
- Specific software is customized to a customer's requirements, covering development, design, programming, customization, adaptation, upgradation, enhancement, and implementation of IT software, and is treated as a supply of services.
- Specific software also includes permitting the use or enjoyment of any intellectual property right, which qualifies it as a service.
- Software procured directly over the internet is typically delivered via an email link or attachment for download, without physical media.
- Software procured through a non-electronic medium is usually supplied in CD or DVD format requiring installation by the buyer.
- Customised software sold online qualifies as a supply of services under entry Sl. No. 5(2)(d) of Schedule II of the GST law.
- Most software procured electronically from international companies is customised and therefore classified as a supply of services.
- Software supplied with an encryption key or sold as a standard off-the-shelf product qualifies as goods under GST law.
Blog Content Overview
Goods or Services? Understanding the Classification of Computer Software under GST
Introduction:
The classification of computer software as either a good or a service has been a contentious issue for businesses since the service tax regime. However, the Goods and Services Tax (GST) Act has provided some much-needed clarity on the matter.
Classification of Computer Software:
According to the GST Act, computer software is categorized as either “normal software” or “specific software”. Normalized software refers to pre-designed software that is available off-the-shelf in retail outlets. It can be supplied in any medium or storage (such as a CD-ROM or through the use of encryption keys) and is treated as a supply of goods. On the other hand, specific software is customized to the specific requirements of the customer and includes development, design, programming, customization, adaptation, upgradation, enhancement, and implementation of information technology software or permitting the use or enjoyment of any intellectual property right. Hence, it shall be treated as a supply of services.
| Computer Software bought over the internet | Computer software bought through non-electronic medium |
| 1. Computer softwares can be procured online, i.e. directly over the internet | 1. Computer softwares can also be procured through a non-electronic medium, i.e. other than over the internet |
| 2. The buyer usually receives a link via e-mail through which the software can be downloaded or the software is sent as an e-mail attachment | 2. These are usually available in a CD or DVD format wherein the buyer has to install the same in its system and operate. |
| 3. In case of online procurement, companies sell two kinds of software, – a general software and – a Customised software which is developed as per the specific requirements of the customer As a customised software is tailored as per the pre-determined needs of the customers, such softwares qualify as supply of services in accordance with Sl. No. 5 (2)(d) of Schedule –II of the GST law. Majority of the computer softwares which are procured electronically from International Companies are customised softwares, hence they are classified as supply of services. | 3. In such cases, the computer software is available alongwith an encryption key or is a type of software which is generally bought off the shelf. Thus, such computer softwares qualify as goods under the GST law |
Conclusion
In conclusion, it can be said that the classification of computer software as either a good or a service depends on whether it is an off-the-shelf product or a customized product. It is important for businesses to understand this classification to determine the appropriate tax treatment for their software-related transactions under the GST Act.
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Treelife
Treelife Team | support@treelife.in
We are a legal and finance firm with a deep focus on the startup ecosystem. We offer a wide range of services, including Virtual CFO, Legal Support, Tax & Regulatory, and Global Expansion assistance.
Our goal at Treelife is to provide you with peace of mind and ease in business.
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