Financial Times

There have been, the occasional “big” story in the press about the Customs Department raiding premises, to confiscate documents and equipment over the lack of payment of “software tax”.

According to K. Kanag-Isvaran, a member of the President's Counsel and a lawyer, it was all hyperbole.

The reason: intangibility. The venue: the 22nd floor of Hatton National Bank Tower for a presentation on “Software, the Law and the Customs”.

It seems that a bank had been raided by the Customs Department following all the proper procedures for their actions. But there was a problem: Was the department’s action actually correct? According to Mr. Kanag-Isvaran, it wasn't.

He argued that you can't import software. Well, you can, but if it's been specifically customised then there is no problem.

The problem here, it seems that there are a few conflicts when it comes to explaining the law: hence the explanation.

To get the point over, Mr. Kanag-Isvaran defined what it took to put together a computer system to enhance the running of big business these days, especially for banks and the like – not to mention those in the know owning smaller businesses.Details here are not necessary as dictionaries are available; but mentioned were software and hardware, and a number of other components. When it comes to the Customs Department there is a difference as we come back to what is tangible and what isn't.

The thing is that you can see the hardware, but not the software. When you import hardware that is not exempt from tax, you pay – because you can see and touch it. This we all know: try importing a BMW and see what the extras are! But what is the criteria surrounding software?

If someone needs a particular type of software that they cannot find in Sri Lanka, they might order it online, or business permitting, buy it abroad. The problem here is when it arrives by post or in your luggage and is declared there is a duty to be paid. But what happens when a company wants customised software; where a second party has entered the country to do a service by installing that software on a mainframe? Where do you stand?

The answer is, by law, you have no problems as that word appears again – intangible. To ensure a safe passage there are a number of ways to ensure legality.

But what is this customisation? How can you get it without upsetting the powers that be? There are actually six ways:

The international software provider (ISP) finds the needed product, and then is commissioned to customise and install it.

The software is sent by email attachment, thus not crossing any physical boundaries. It is sent directly from modem to modem online. ISP visits, say, a bank, writes the program, and then instructs staff how to install it. Staff is educated over the phone from an expert.

The ISP's local agent installs the program onto the computer.

What has to be remembered is that through all these processes, the software is still intangible, if customised.

The thing here is that what has happened is a company has paid a fee for a licence, where the writer retains ownership, but the customer gets to use it. As Mr. Kanag-Isvaran said, “Licences are as common in the software world as sale's receipts are to the retail world.”

And because this licensed software has been customised, it is no use to anyone else. It is only useful to that company due to the specifics asked for; plus the software was installed – no physical boundaries were crossed.

The licence also forbids the company from copying the software unless it's for necessary factors, such as for back-up insurance or archives, for example.

As for the Customs Department, according to particular sections of the Customs Ordinance, what can be taxed are goods, articles and commodities. But as you can see, these items are all tangible. When something new is added to the list (the HS Code as it's known), it has to be made public in the Gazette before the law can be changed – but software as a product is not there.

Even if disks or tapes are left behind for back-up, the process is still seen as intangible. A good example given by Mr. Kanag-Isvaran was what if you go abroad and write some software on a laptop. When you return, do you have to declare it and pay tax? The answer was no.

Another example was if you asked an Indian advertising company, say, to produce an ad for you. When you return with it on tape, do you have to declare it – according to the law, no.

So if Customs Department officials do come knocking, let them in as they do have the power to take anything they want, but if it's all about software tax, and yours is customised, hire a knowledgeable lawyer and you should be alright.