Intellectual property: Does service tax or VAT apply?

The 46th amendment to India’s constitution, in 1982, inserted article 366(29A), which defined purchase/sales of goods and extended the scope for levy of value-added tax (VAT)/central sales tax (CST) to the “transfer of right to use goods”. An immediate issue was whether intellectual property (IP) is goods, and exploitation/transfer of IP as a transaction attracts VAT. Much later, the levy of service tax was extended to include transactions involving “temporary transfers”, and “permitting the use or enjoyment” of IP.

The issue of what levy would be applicable has arisen owing to the failure of enactments to clarify what constitutes “transfer of right to use”, and further, due to the divergence in the philosophy adopted by the legislature as against that of the judiciary in interpreting the statutory provisions.

In situations involving licensing of IP (but not an assignment) the issue is determining the levy applicable and the test to be applied for this purpose. VAT being a state levy and service tax being a central levy adds to the complexity.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune, Ahmedabad and Bangalore. Ranjeet Mahtani is a senior associate and Sweta Rajan is an associate at the firm.