This update looks at how the position in India on the chargeability of packaged software to customs duties has changed as a result of legislative amendments made in December 2010 and March 2011. Before these amendments came into force, assessees had two options:

  • to pay additional customs duty in lieu of central excise duties (CVD) on the entire consideration for packaged software and avail of an exemption from service tax; or
  • to split the values for the medium and licence, and pay CVD on the former and service tax on the latter.

The service tax exemption was available only in respect of shrink-wrapped software intended for single use and packaged accordingly. In all other cases the route of split values for the medium and licence had to be followed (for further details please see "Customs duties on software").


The December 2010 amendments sought to tax packaged software as goods; therefore, the notifications (through which the applicability of CVD and service tax were made mutually exclusive) have been rescinded. In parallel, a new service tax exemption has been issued, which exempts the transfer of the right to use software (ie, the licence) from service tax, subject to satisfaction of the following conditions:

  • The value of the goods must be determined on the basis of the retail sale price minus the 15% prescribed abatement (the retail sale price is a price inclusive of all taxes, which is to be mandatorily declared for certain products under the Legal Metrology Act 2009, a consumer protection law). Under the central excise law, one of the bases for valuation of goods is the retail sale price minus a prescribed abatement in lieu of post-manufacturing expenses, as excise is a duty on manufacture;
  • The appropriate CVD must have been paid; and
  • A declaration must have been given by the service provider to the effect that no amount in excess of the retail sale price declared on the goods has been recovered from the customer.

By treating software as goods, the December 2010 amendments have effectively removed the choice between paying customs duty or service tax on the licence fee. Under this scheme of taxation, subsequent sales of software (eg, from the reseller to the end customer) will also not be liable to service tax; the exemption will continue to apply, since CVD was paid on the retail sale price at the time of import. Ironically, this tax treatment is diametrically opposed to the position initially set out in 2009, according to which software was characterised as a service, on the basis of which CVD was exempt on the condition that service tax was paid on the licence fee.

However, the December 2010 amendments did not address the treatment of those transactions for which the Legal Metrology Act does not require a retail sale price to be affixed. Examples of such transactions include:

  • sales to institutional customers;
  • software with a limited validity imported for demonstrations (or original equipment manufacturers); and
  • software supplied free of charge under annual maintenance contracts.

As a result, unless the supplies of software and licence were split, importers of non-retail sale price software faced the prospect of double taxation. This lacuna was rectified in March 2011 through the introduction of a separate exemption covering such imports on which an importer pays CVD on the value of the medium and service tax on the licence fee. Therefore, in effect, the present position is that software is treated as a good in the context of retail sale price transactions, but as a service in the context of non-retail sale price transactions.

A recent clarification has also addressed other issues in relation to the levy of customs duties on packaged software. Previously, importers faced difficulties in relation to classifying software licences that are imported separately (eg, where the software is electronically downloaded instead of being physically imported). Such imports usually comprise paper licences or personal unlocking keys (PUKs) in the form of a cardboard or plastic scratch card. Customs authorities insisted on classifying these software licences under the same tariff heading as that for 'IT software services', which attracts a 10.3% effective customs duty rate. The clarification explains that paper licences and PUKs do not meet the definition of 'IT software', and that their correct classification is under separate tariff headings which attract a 0% effective customs duty rate.


These amendments serve to highlight the tax authorities' shifting position in relation to the characterisation of software, and therefore its taxation. This dichotomy also plays out in a post-importation context in terms of whether transactions relating to software should attract value-added tax levied by the states on the basis that goods are sold, or whether service tax should apply. In the absence of a determination as to which constituent element of software is to form the basis for taxability (ie, the sale of the medium on which it is contained or a licence of the copyright permitting the use of the software), and given the breadth and overlapping scope of the levies, tackling the double taxation of packaged software in India remains a challenge. A separate set of issues arises in the context of customised software.

For further information on this topic please contact Udayan Choksi at Economic Laws Practice by telephone (+91 22 6636 7000), fax (+91 22 6636 7172) or email ([email protected]).