Introduction
The treatment of Intellectual Property Rights (IPR) under the indirect tax regime of India has long been a topic of debate and ambiguity. Before the Goods and Services Tax, businesses had often had an issue with whether a transfer of IPR would be called “goods” or “services,” which caused some confusion; that led to double taxation of the same transaction since sales tax and service tax were taxed upon the same thing. This gave way to service tax from the government on IPR if it fell within the ambit of services. For states, VAT or sales tax would then be collected based on this transaction as sales of any goods. Paying out both was deemed an over-strain of money.
But the introduction of GST brought about the removal of a classification – that of goods versus services, of IPR-related transactions. GST now allows a structured, though at the same time complex system to resolve taxability on IPR transactions in India.
Understanding Temporary and Permanent Transfer of IPR
Under the GST regime, taxability of IPR transfers has been defined as either a temporary or permanent transfer. Temporary transfers of IPR, or allowing the use or enjoyment of any intellectual property, are considered “supply of services.” According to Schedule II, entry 5(c) of the Central Goods and Services Tax (CGST) Act, temporary transfer of IPR is taxed at 12% GST, that is, 6% CGST and 6% SGST, unless the intellectual property happens to be IT software.
Transfers of IT software, on hire basis, will qualify as a service liable for levy and collected at 18% that would cover 9% CGST and 9% SGST under the head of licensing services for the right to use intellectual property. There are extra dimensions of added complexity and value in IPR through the process of IT software licensing as distinguished from other categories of IPR.
Permanent transfers of IPR, however, would fall within the definition of “supply of goods” under GST and will be taxed at 12% if it is not related to any IT software. Thus, selling or transferring ownership of IPR can be said as merely selling goods and attracting GST on such sales at the applicable rate for goods.
This only leads to confusion, though, in cases of IT software because IT software transfers IPR are considered to be under both – goods and services- categories as the nature of transaction dictates. Double classification may lead to potential confusions and procedural complications in matters of determination of time of supply, place of supply, invoicing, and right availability of Input Tax Credit for businesses. Since there apparently is no clear distinction between goods and services in IT software, there tend to be inefficiencies in compliance handlings and record keeping.
The Complexity of Permanent Transfer and Licensing
It is important to note the treatment of IPR under GST by differentiating between a transfer and a license. License is a permission to use an IPR, but not its transfer. In this case, the license is considered as a service and comes under the head of services. However, when the ownership of the IPR is permanently transferred, it is considered a sale of goods and hence comes under the head of goods under GST.
The two differ by critical distinction as it goes for the GST rate that shall be applied and also for the classification. In fact, the transfer of IPR is treated as an assignment—here, the assignee has the intellectual property rights and can exercise those independently. A license is only granted as a permission to use IPR without transferring ownership. So, it continues to remain a service.
This would be critical for industries where licensing and permanent transfer seem to blur often-for example, in the software business,entertainment business, or publishing business. Under GST, while transactions through licensing would be treated as services, assignment would be treated as goods.
Branded vs. Unbranded Goods: The Impact on IPR
Another interesting angle of the GST regime is taxation of branded and unbranded goods. Goods, including raw grains, pulses, honey, and cereals sold loose and without any name are GST exempted. The same goods when sold under a registered brand name attract GST.
This distinction can create loopholes particularly for small businesses. A commodity that is sold under a brand name unregistered under the Trade Marks Act, 1999 would help in avoiding GST liabilities in respect of the same. That, in turn, would help businessmen not to register the names of their brands, which creates an issue for IP industries relying on brand recognition and protection under trademark laws.
The operation of unregistered brands under GST lacks clarity, which might defeat some value of intellectual property rights in India to the detriment of business entities that depend on branding for differentiation purposes in the marketplace.
Copyright and Reverse Charge Mechanism
Besides license and assignment of IPR, specific provisions regarding copyright-related transactions are available under the GST regime. In GST, a number of categories of supply attract tax through reverse charge. These include supply by authors, musicians, photographers, and artists. At any time while making such transfer or allowing a copyright work for use, the tax is levied on the service receiver rather than on the supplier.
This reverse charge mechanism puts the burden of tax on the recipient of services and, thus, makes compliance rather more complex in business usage for large-scale copyrighted materials.
The Way Forward
Even if tremendous progress has been witnessed over a fairly short period under the new regime of GST, there is hardly any area where taxpayers as well as tax practitioners require explanations clarifying taxability under such a transaction. IT software was covered both as goods and service and taxation complexities over branded and unbranded commodities stand lacunae under the existing regime.
Hence, the government must be even more clear in their guidelines and regulations to ease business decision making on the IPR taxation landscape under GST for smoother compliance and dispute resolution. It will also prevent tax avoidance and litigations and enhance ease of doing business in India by creating opportunities for growth and innovation, especially in areas based on intellectual property.
As the Indian economy moves towards becoming digital-first, these ambiguities in the GST framework will have to be addressed in order to create a healthy environment for intellectual property rights and ensure that the tax system supports innovation without choking growth.
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