In 2017, the Goods and Services Tax (GST) was introduced as a destination-based consumption tax subsuming in itself, the erstwhile taxes like sales tax, service tax, excise etc. under the new regime, the tax is levied simultaneously by the Central and State/Union Territory government and such tax is levied on the supply of Goods or Services or both. It is touted as the biggest fiscal reform the country has ever witnessed. The immediate and notable change visible, is change in prices. The government has claimed that essential commodities will be kept outside the purview of the new regime. The aim to subsequently reduce the burden laid upon the consumers, which resulted in a “cascading tax” effect.
As per Section 9(1) of the Central Goods and Services Tax Act, 2017, “there shall be levied a tax called the central goods and services tax on all intra-state supplies of goods or services or both, as maybe notified by the government on the recommendations of the Council”.
The term ‘Intellectual Property Rights’ is not defined under the GST Law but MF(DR) circular No. B2/8/2004 dated 10/09/2004 states that intellectual property emerges from application of intellect, which may be in the for of an invention, design, product, process, technology, book, goodwill etc. Intellectual property rights are similar to any other property right. They allow the creators or innovator or authors of trademarks, patents or copyrighted works to benefit from their work or investment in a creation. IPR is becoming an integral part of businesses. However, the intangible nature of intellectual property presents difficulties in comparison with traditional property such as land or goods. The ‘indivisible’ nature of intellectual property also allows many people to have an unlimited access at once.
Intellectual Property Rights owners are expanding the usage of their properties by way of giving license or assignment. To expand market share, the businesses are acquiring/using each other’s intangible properties. Therefore, the transfer of rights can be done in two ways: Right holders can give their rights by a licensing agreement or by way of an assignment. On one hand, licensing agreements do not transfer the proprietary rights whereas assignment gives the entire ownership of the properties.
Under the pre-GST regime, the permanent transfer of intellectual property was not considered as supply of service. The circular stated since the original owner does not remain the holder of intellectual property post transferring, it cannot be said as a supply of service. The opinion was also reiterated in AGS Entertainment Pvt. Ltd. vs. Union of India by the Madras High Court. In another pronouncement by the Customs, Excise and Service tax Appellate Tribunal stated that there is no service tax applicable on the permanent transfer of intellectual property.
Post the introduction of GST, the tax to be levied on intellectual property was provided under heading 9973 of the Central Tax (Rate). It states that under services, the temporary or permanent transfer of Intellectual property other than Information Technology Software is taxed at 12%. Similarly, under goods, the temporary or permanent transfer of IP other that Information Technology Software is taxed at 12%. It may seem through a bare reading that all kinds of services are capable of a permanent transfer. However, a reference to the heading of 9973 provides the contrary. The heading reads as “Leasing/rental services with or without operator”. It clarifies that the scope of the heading is limited to the particular services of leasing or rental. The broad language of 9973 is restricted by its heading. The author is of the opinion that except for leasing and rental services, the transfer all other services are only temporary in nature and in some instances, leasing and rental services also form a part of temporary transfer. On the other hand, the transfer of any goods can be considered as a permanent transfer. Therefore, apart from the exception of leasing and rental services, temporary transfer shall be regarded as supply of service and permanent transfer as supply of goods. Evidently, the position of law more or less remains the same.
Type of transfer
Transfer of goods
Transfer of Services (except IT software)
Transfer of Information Technology Software
Through a notification issued on June 28, 2017, the government fixed a 5 percent GST rate on food items packaged in unit containers bearing registered brand names. The term registered brand name is defied as the one actually on the Register of Trademarks and in force under the Trademarks Act, 1999. With regards to the term ‘packaged’, the Finance Ministry clarified that goods such as chhena, paneer, natural honey, wheat, rice, pulses and cereal flours, if sold loosely shall not be taxed under GST. The rationale behind imposing a tax of 5% is to level the playing field between high-profit margin players and the companies selling non-branded products in the market. But this action is posing more problems. This exemption in a way is pulling down the culture of trademark protection. Due to this, the choice between registering a trademark or imposing an additional 5% cost, has to be made by the companies.
Even the big established firms in the market have started taking an undue advantage of the provision. Although the prime objective was to incentivize small farmers, the established companies, especially in the rice market, which are not registered with the Registrar of Trademarks, take the advantage.
From the consumers’ perspective, the new GST policy is likely to increase the supply of counterfeited products in the market. Consumers might be misled about the origin and quality of the product due to absence of trademark. It would not only pose a threat to company’s goodwill but also health of the consumers due to low quality. The policy also undermines the steps taken by the government to encourage MSMEs to register their brand.
It is essential that more than protecting one segment of the market, the policies must focus on ensuring homogeneity for all the players in the market.
Section 9(1) of the GST Act clearly provides that the tax has to be deposited by the person supplying the goods and/or services. On the other hand, Section 9(3) incapsulates the concept of Reverse Charge Mechanism. The principle states that the tax liability must be discharged by the recipient of the goods and/or services and not by the supplier. The government, on the recommendation of the GST Council, has the powers to specify the categories of such supplies of goods and/or services to be treated as per the RCM.
Pursuant to this power, the government came out with the notification, Entry no. 09 which states if the services are supplied by an author, music composer, photographer, artists or like persons, by way of transferring or permitting the use of copyright covered under Section 13(1)(a) of Copyright Act, 1957 which relates to original literary, artistic or musical work, to a publisher, music company or producer, then the said recipient will be liable to discharge the tax liability.
For example: XYZ musician wishes to supply her work to ABC music producer. XYZ shall be the supplier and ABC shall be the recipient of supply of service. According to the principle of Reverse Charge Mechanism, ABC, being the recipient, shall be liable to discharge the tax liability.
Intellectual Property Rights are at the nascent stage in the software industry. Trademarks, Patents, Copyrights and Trade Secrets are prevalent in the software industry. The patents, copyrights and trade secrets protect the technology itself. On the other hand, trademarks protect the names or symbols that are used to distinguish the product in the marketplace. The patent protects the novelty and inventive step in the innovation whereas copyright tends to protect the expression of idea used by the author.
The CGST Act defines the development of software as service but a software in its physical form is ‘goods’ as under the Customs Tariff Act. In Tata Consultancy Services vs. State of Andhra Pradesh, the hon’ble court held that the canned software like Oracle and Lotus are ‘goods’. From the moment the copies are made, produced and marketed, the software becomes goods. Therefore, while levying GST, the authorities must be diligent about the distinction between software as ‘goods’ and ‘services’.
To avoid any convenience and chaos, the authorities have decided to keep the GST rate of software as goods and software as a service in the form of development, same. Software can be transferred on temporary or permanent basis. Temporary transfer of rights of software is a service. On the other hand, the permanent transfer of the rights of software is under goods. The GST rate in both the scenarios is 18%.
It is essential to consider the place of supply as well while imposing GST. Software is intangible and it can exist on multiple platforms at once. Therefore, the place of supply of development of software and services on software is the location of the recipient.
The franchisee fees and royalty received by the owner under the franchise agreement for the use of trademark, copyright, patent or any other proprietary knowledge protecting mechanism are classified under “Other professional, technical and business services” and accordingly, attract the GST @ 18%.
With the introduction of GST at nascent stage, it is still to be seen as to how the implementation is carried forward. At the very least, the GST has brought about a positive change by doing away with the need to classify transactions as either relating to goods or services since all transactions would now be concurrently levied tax by both the Centre and the States (provided transaction is intra-state supply; inter-state to be levied exclusively by Centre). The GST has also subsumed numerous central, state and municipal taxes and by doing so, will ensure that indirect tax rates and structures are common across the country thereby increasing certainty and ease of doing business. It was essentially the need of the hour, which the current government understood and implemented. However, it gave rise to conflict of interest between the two important laws: Trademarks and Indirect Taxation. The check and balance system needs to be incorporated to initiate the efficiency. Therefore, the future clearly holds the future of GST.