17 Jul GST and its implications on Intellectual Property Rights
GST is expected to become a significant reform in the country when it comes to indirect taxes. Multiple taxed levied and collected by the state and the central government will now be replaced with a single tax called Goods and Service Tax (GST). GST is a multi- stage value added tax levied on the consumption of goods or services or both.
For all the transactions that takes place within the state, both central and state government shall levy tax
There are two components of GST, for all the transaction that takes place within the state, both the central and the state government will levy tax, mainly;
Central tax: (CGST)
State Tax: (SGST)
Additionally, for all inter-state trade or commerce, before commencement of GST, Central Sales Tax (CST) was regulating the inter-state trade or commerce. Only parliament was authorised to levy tax on exports of goods and services outside state and/ or outside the country for that matter, till now. But the CST had downfalls such as the collection of tax was retained by the origin state but the tax payer is the consumer of the destined state in case of import of goods or services and said tax must accrue to the destination state. Piles of tax resulting out of cascading of tax in the supply chain as Input tax credit was not available to the buyer. Compliance cost in addition for business that affect free flowing of trade. Lastly huge difference in the VAT and CST levied by the inter-state and the Intra-state sales respectively felt the need of IGST.
IGST shall monitor the inter-state trade of goods and services and ensure the SGST component accrues to the consumer state. IGST would be levied by the Central Government on all interstate transactions, including Jammu & Kashmir, of taxable goods and services.
Intellectual property right and taxation has always been a debatable matter in the country. Back in 2003, government waived off excise duty on patented products for a period of 3 years from the date of commencement of the manufacturer, provided the manufacturer was Indian, under Central Excise Tarriff 1985. Furthermore, to promote Intellectual property and benefit the tax payers earning from royalty out of IP transfers/ licensing, the income tax payable to the assesse for the income obtained from such royalty was reduced to 10% effective from 1 st April 2017.
Whereas GST implements temporary transfer or permit of use or enjoyment of IPR and designing, upgrading, adapting, implementing activities, etc, related to software to be classified as service for levy of service tax. Software products (electronic downloads) to be charged 18% (Serial no 36 – residuary category of the GST rate for services). Software products sale is usually right to use and not transfer of copyright itself. Also, Temporary transfer or permitting the use or enjoyment of any Intellectual Property (IP) to attract the same rate as in respect of permanent transfer of IP – 12% (serial no 20 of the GST rate for services). It is unclear that how software downloads license and use of IP right and royalty be affected by GST.
For trademark which are not registered under Trademarks Act, 1999, will not attract 5% of GST on staple foods like rice, wheat etc. The famous brand “India Gate” is tax free as the brand name is not a registered trademark. KRBL owns the brand India Gate rice and have applied many a times for trademark but was objected or refused as Vikram Roller Flour Mills Ltd was holding the trademark until 2013. Whereas McCormick and Co, that sells Kohinoor packaged rice in India had to pay 5 % GST, thus making their products more expensive. It will also affect trademark filing in India, if manufacturing companies will interpret GST this way.
This generalized tax change has contradicted the provisions made by the government in the amendments made in the Income tax act this year, moreover we seek clarity on the scope of taxability on transactions between a taxable person (IP owner claiming royalty at 10 % income tax rate) and the licensee in GST ACT 2017.
Article Written by: Krupali Rane, Lead Consultant, Scinnovation Consultants Pvt. Ltd.