Knock, knock.

Who’s there?

E-commerce.

E-commerce, who? India does not care for you.

The Union Budget 2010 is setting up the government for some serious ridicule from the Indian Internet community if this Business Line report is true. It says that the new budget has proposed a 10% service tax on all downloads of paid software applications onto a mobile or a personal computer. Make that 10.3% tax because software created by “foreign suppliers” will be charged more under an irksome clause called ‘reverse charge principle’ and most of the software or the latest mobile apps we buy is developed by foreign companies.

Under this reverse charge clause, individual users will apparently have to register for the service tax provisions and file the statutory returns for every piece of software they buy online, even for personal use. To top it off, this is applicable for every individual purchase one makes. So if you wanted to upgrade your blog’s theme and bought one, you would automatically have to go through the process of registering and filing 10.3% service tax on it! And how will the government keep a track of every user in India who purchases software online? Mobile networks might be easier, but does the government really expect all of them to diligently register and file the service tax? Ridiculous.

The government is taxing all kinds of software you really need to use (and the groovy mobile app you just HAVE to have) and has ensured you dont get away with saving even a little on online purchases with this shameful anti-Internet move. In case a clarification was necessary, this move is not meant for free applications or software we download all the time – just the ones we pay for.

Will App Stores Lose Momentum?

Prices of all paid applications you download onto your mobile from app stores that are mushrooming – Airtel’s AppCentral, Idea Cellular’s Mobstore, Aircel’s upcoming app store, the ever-popular iTunes Store or Blackberry World India – are also going to get the 10% service tax addition. This will push the buying decision of some users (even if by a fraction) to “not”, resulting in lesser participation and another hurdle for publishers and developers.

For all those with iPhones in India who thrive on the best app additions to the iTunes Store, our heart goes out to you.

PC Software & The Gray Market

Why did the government extend the rule to include mobile applications and software for home users? It does not make sense. Previously, only that software which was intended for commercial purposes – such as an organisation buying multiple licenses for employees – were taxed. Now, even home users – a user buying and downloading Adobe Photoshop so he can play around with his photo collection – should also be charged a service tax of 10.3% too. It is obvious that piracy will soar and the gray market will flourish like never before.

Software such as Microsoft Windows Vista OS, Adobe Photoshop, AVG AntiVirus, etc are classified as packaged/ boxed software and when retailed in India, their cost was inclusive of the service tax of 10%. But offering the same as a download was advantageous to both the software maker as well as the user – the maker saved on packaging costs (CDs/DVDs) and logistics, distribution while the user saved himself the walk to a store (or petrol ka kharcha) to buy the software. He could just click and download it (and contribute in a small way to the environment).

Since the maker saved on the distribution costs, the download price was lower and the user benefited from that too. But now, the government has proposed that the pricing should be the same, either way the user chooses to get the software. It would have even made sense if the government had authorised software publishers to include the service tax with the MRP for India – but putting the onus on users is nothing but a nuisance.  It is also a surefire way of telling the rest of the world that India’s e-commerce does not work.

The Business Line article states that ALL paid software will be charged the tax but does not mention if this includes online updates – such as a security update for an antivirus. What happens then?

It quotes a consultant as saying that “This amendment brought in with respect to information technology software services will create a lot of hardships.” Understatement of the year.

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