Software is a unique product under GST because it can be supplied as a good or as a service depending on the nature of the transaction. When software is bundled with an AMC, the classification as composite supply and the principal supply become critical.
Software as Goods or Services
Under GST, development, design, programming, customisation, adaptation, upgradation, enhancement and implementation of information technology software are specifically classified as services under Schedule II, paragraph 5(2)(d).
However, sale of pre-packaged or canned software delivered on a physical medium like a CD or DVD may be treated as supply of goods. Downloaded software licences are generally treated as services.
The GST rate for software services is typically 18%. For software goods, the rate may also be 18% depending on the HSN.
AMC as a Service
An Annual Maintenance Contract for software typically includes:
- Bug fixes
- Technical support
- Updates and upgrades
- Troubleshooting
- Helpdesk access
This is a service and is taxable at 18%.
Bundled Software with AMC
When a software licence is sold along with an AMC for a single price, the question is whether it is a composite supply.
Composite Supply Test
- Software is the main product the customer wants.
- AMC is ancillary to the software; without software, AMC is meaningless.
- They are naturally bundled in the ordinary course of business, especially for perpetual licences with a maintenance period.
Therefore, the supply is a composite supply with software as principal supply. The entire bundle is taxed at the GST rate applicable to software, which is 18%.
Separate Billing
If the software licence and AMC are separately priced, invoiced and optional, they may be treated as two separate supplies. The software is taxed at 18% as goods or services, and the AMC is taxed at 18% as a service. Since both rates are often the same, the practical difference may be minimal for tax rate, but ITC treatment and classification still matter.
Subscription Model (SaaS)
Software as a Service (SaaS) is supplied as a service. When SaaS subscription includes support and updates as part of the subscription, it is generally a single supply of software service. The support is ancillary to the subscription, not a separate AMC. The entire subscription is taxed at 18%.
If a separate AMC is sold for a perpetual licence, the AMC may be a separate supply but still taxable at 18% as a service.
Input Tax Credit
A business purchasing software with AMC for use in taxable supplies can claim input tax credit of the GST charged, subject to Section 16 and Section 17. The credit is available for both the software and the AMC if they are used for business.
Practical Example
A company purchases an ERP software licence for Rs 10,00,000 plus 18% GST, including one-year AMC. The supplier invoices a single price for "ERP licence with AMC". This is a composite supply with software as principal supply. GST at 18% is charged on the entire Rs 10,00,000.
If after one year, the customer renews only the AMC, the renewal is a supply of maintenance service and taxed at 18%.
Common Mistakes
- Treating software licence and AMC as separate supplies without a proper contractual split, leading to classification disputes.
- Applying a lower rate to the AMC assuming it is ancillary.
- Not identifying whether the software is supplied as goods or services.
- Failing to maintain proper documentation for the composite nature.
How Anuj Desai & Associates Can Help
We help software vendors and buyers classify software and AMC transactions, structure invoicing, apply correct GST rates and manage ITC claims.
Contact Anuj Desai & Associates
Email: office@anujdesaiassociates.com
Phone: 9619456656
Website: https://anujdesaiassociates.com
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