Software not subject to customs duties

by Gamini Warushamana

Information and software passing across borders through the information superhighway cannot be taxed as imports or exports by customs since they are intangible and pure information of intellectual activity. Nowhere in the world software is subject to customs duties and a new legal regime is needed to tax software, said President's Counsel Kanag-Isvaran addressing a seminar organised by the Hatton National Bank (HNB) at the HNB auditorium in Colombo last week.

Isvaran said that software purchased by banks, any organisation or a person from suppliers abroad are not bound to pay customs duty as they are not tangible goods or commodities. Purchase of software other than customised software cannot be defined as imports, he said.

Customs duty on software imports is a hot issue in business circles in Colombo after a recent Supreme Court judgement. Recent media reports based on the SC verdict said that intellectual components of a software CD or Diskettes and all software purchased from abroad are subject to customs duty.

Customs officials have interpreted the decision in a similar manner and said that all software purchased is subject to customs duties and leading commercial banks in the country have to pay over Rs.1.5 billion on uncustomed software imports.

Software are computer programs used in computer systems. Commercially it may be a standard package written to meet a particular function, i.e. Windows HP or virus guard or a program to tell the computer the way it functions. Software is in non physical form and they are purely information of intellectual activity.

They are intellectual properties that confer copyright to the creator (author). The author can pass the title for assignment and intellectual properties cannot be sold as physical goods and they can be assigned or be given as a licensed contract.

In assignment, the ownership is transferred and the author has two rights on the property; economic rights and moral rights. Transferring or reproducing the property come under economic rights while in moral rights the author can ask the user to acknowledge the authorship of the property.

In a licensed contract ownership is not transferable. If it is a software it is installed in a location and copying or modification is prohibited. Isvaran said that the same rules apply to software and therefore software cannot be sold and they can be assigned or the licence contracted.

He explained a possible way of obtaining software by banks. Banks can commission international software providers to provide a banking application. Banks can also ask a software company to modify its software discussing with bank staff to meet its requirements or write entirely new software for the bank to meet its requirements.

Banks can also purchase software from local agents of the foreign company. The software can be transferred to the banks as a e-mail attachment or the telephone to telephone or modem to modem.

Isvaran explained that under these circumstances software are not tangible goods and does not come across the borders and hence do not come under the Customs Ordinance (Co). The Co deals with only tangible goods or commodities. Under Section 9 of the Co the Commissioner General of the Customs has the power to investigate. Section 128 gives power to CG customs to enter, search and seize such uncustomed goods. However, customs cannot do this for software, Isvaran said.

Isvaran said that the judgement is clear and it said that software should be valued under Section E of the Co. The Co clearly says that the intangibles are not goods. Therefore customs officers have no right to inquire and charge duties on software.

However, customised software comes as CD or diskettes should be valued at face value of the CD. There is no mechanism to tax information coming through the information superhighway. You can download Norton Anti Virus software from the internet but customs cannot charge duties on it, Isvaran said.