GST Perspective Of Intellectual Property Rights

Intellectual Property is the property or value created by the application of intellect

This invention or property can be exploited by another person without any research and development expenses and any major cost.

To put the person creating this intellectual property at the fair footing, Intellectual Property Rights (IPRs) are granted over a certain period of time for exclusive use.

Intellectual property rights can be in many forms:

  • Copyright: This right is granted to protect the rights relating to music, films, literature and other creative works as well as the source code of computer program.
  • Trademark: This right is granted to protect the symbol of the organization representing its logo or brand. It can be in the form of the word, figure, slogan, etc. It may also provide protection for the packaging of a product.
  • Patent: This right is granted to protect the rights relating to inventions, i.e., for providing a novel technical solution for a problem.
  • Trade secrets: This right is granted to protect the rights relating to formula, practice, process, design, instrument, pattern, commercial method, or compilation of information not generally known or reasonably ascertainable by others.

IPR concept protects the rights of inventors or contributors to the market. The major areas of the dispute are the nature of IPR, determination of place of provision, classification, and applicability of VAT/Service tax, etc.

GST has tried to keep a similar treatment to the extent possible for both permanent and temporary transfer of intellectual property rights to do away with issues relating to classification and rate.

Transfer of IPR- Supply of Goods or Service

  • Classification of supply as goods or service is still an important factor under GST even after bringing a single tax for both goods and service. This is because of different provisions of time of supply, place of supply, rates, exports, etc.
  • Nature of IPR as to goods or service has been a major point of dispute in the erstwhile regime and a plethora of judgments for determining the nature for transfer of IPR are there which are still going on at higher authorities or appellate levels.
  • GST law has given the definition of Goods or services. Goods as per definition of GST law means every kind of movable property. Since the movable property is not defined under GST law, reference should be taken from the General Clause Act which says that movable property means property of every description, except immovable property. Accordingly, we can deduce that IPR shall be treated as goods as it is a property which is not immovable in nature. Needless to mention that goods cover both tangible and intangible property.
  • Goods can be transferred through sale or licensing – permanent disposal or temporary disposal of IPR. Permanent transfer of IPR is a supply of goods. GST law through its entry No. 5(1)(c) of schedule II of CGST Act has clarified that temporary transfer or permitting the use or enjoyment of any intellectual property right shall be treated as supply of service.
  • Confusion has arisen by entry No. 17 of Notification No. 11/2017, i.e, rate notification of services. This provides that or permanent transfer or permitting the use or enjoyment of Intellectual Property (IP) right in respect of goods other than Information Technology software can attract a GST rate of 12%. Thus, brings everyone in a perplexed situation as to how permanent transfer of IPR is governed by the GST rate provided for services. But it has been cleared in Sr. No. 250 of Scheme of classification of service that this rate shall be restricted for licensing service only and, thus, not applicable when there is the sale of IPR. The same rate has been made applicable in case of the permanent transfer of IPR through a notification issued determining the rate of goods

Transfer of IPR

  • GST law provides different sets of rules for determining the place of supply of goods and place of supply of services. Permanent transfer of IPR shall be governed by place of supply of goods, temporary transfer of IPR shall be governed by place of supply of services.
  • Temporary transfer of IPR can be governed by the residuary provision of section 13 determining Place of supply of services which says that situs shall lie in the location of the recipient of service.
  • Place of supply for the permanent transfer of IPR is a debatable one as a place of supply of goods is dependent upon the movability of the goods. Because there is varied interpretation as to whether the sale of IPR involves any movement, it is difficult to say with certainty as to where does the situs of the place of supply lie.

Transfer of IPR – Clarities brought and vagueness created

  • Following are the certain clarities regarding IPR:
    • Rate of tax for both temporary and permanent transfer of IPR has been rationalized, thus the rate:
      • For Information Technology software, it is at 18%
      • Other than Information Technology software it is at 12%
    • With GST temporary transfer or permitting the use or enjoyment of a copyright relating to original literary, dramatic, musical or artistic works or cinematograph films, which used to be exempt from Service Tax is no longer an exempt supply. Under GST, this exemption has been taken away. The supply of all these intellectual property rights (in respect of goods other than information technology software) attracts GST at the rate of 12%, though it has now been taken under the gamut of reverse charge.
    • The specific rule for determining the point of taxation or time of supply in case of copyrights, etc., has been done away with. It shall be determined as per normal provision under GST Regime.
  • The following issues have come up because of GST:

    • Use of IPR by associated Company overseas: Since there is a general trend of using a brand/trademark or other IPR registered by the parent Company by all its branch operated overseas, the issue arises whether using such IPR services by the branches will result into supply. The issue becomes more complicated as every transaction between the related and deemed distinct person in the course or furtherance of business even without consideration brought under the ambit of GST through entry 2 of Schedule I of CGST Act and the recent the pronouncements of Advance ruling authorities like one in Columbia Asia hospitals (P.) Ltd., in re [2018] 100 50 (AAR-Kar.) keeps on widening the scope of such entry
    • Whether there is any movement in case of the permanent transfer of IPR? If yes, what shall be the criteria to determine where the movement terminates due to the intangible nature of IPR? To answer these questions one has to really look into facts and agreement of the case.

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