Is Computer Software a Good or a Service?
Written By
Ashish Kumawat
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Quick Summary
The classification of computer software under India’s Goods and Services Tax (GST) framework hinges on its nature and delivery method. Off-the-shelf software, often referred to as “normal software,” is pre-designed and available in retail outlets or via physical media like CDs. This type is treated as a supply of goods under GST. Conversely, “specific software” is customized to meet individual client needs, encompassing activities such as development, design, programming, and customization. Such bespoke software is classified as a supply of services. Understanding this distinction is crucial for businesses to ensure proper GST compliance and accurate tax treatment of their software transactions.
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.
About the Author
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Ashish Kumawat
Principal Associate | VCFO | ashish.k@treelife.in
Leads strategic finance mandates under the VCFO vertical, supporting high-growth startups with financial planning, compliance and decision-making insights.
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