Internet Based Services – Ambit Widened & Foreign Companies to Pay Service Tax in India

The Government of India has recently made amendments in the Service tax legislation that proposes to tax foreign entities providing online information and database access (‘OIDAR’) services. The amended provisions are effective from December 1, 2016.

The ambit of OIDAR services that currently covered access to online information websites and databases using internet has now increased to include electronic services including online gaming, online distance teaching, downloading music, content, news, provision of advertising space including banner ads on websites, use of search engines and internet directories, supply of softwares, website hosting, online maintenance of programmes, cloud storage etc.

Until now, the OIDAR services were taxed in the country of the service provider and consequently, when provided by overseas service providers to Indian customers were not taxable. With the amendment in law, the liability to tax such services and pay service tax has now shifted to the Indian customer for B2B transactions (under the reverse charge mechanism) and on the overseas service provider in cases where the recipients are Government, Governmental agencies and individuals (using such services for private consumption). Specific exemptions given to Government, Government agencies and private individuals for consuming services from overseas service providers have been removed.

Under the amended definition, there shall be two primary enablers for a service to be categorized as ‘OIDAR services’, i.e., the service should be provided via Information Technology (using internet or other electronic network) and there should be an automatic delivery of such service, i.e., with minimal human intervention. What is important to note is that there should be a substantial usage of internet while providing the services and the service should be provided automatically. Thus, an opinion of a tax consultant sent via email to his client will not be taxed as there is no automatic provision of a service. Downloading an e-book or using cloud storage services shall however be taxed.

The amendment not only enlarges the scope of internet based services, but simultaneously makes a paradigm shift in the way these were taxed at the moment. Foreign service providers providing B2C and B2G services shall need to take registration, charge service tax and deposit with the Government. The Indian service tax registered assessees would need to pay service tax under the reverse charge mechanism.

The amendments have clearly laid down the guidelines to identify when would a service recipient be deemed to be located in India. A service recipient shall be deemed to be in India if the credit/debit card used by him has been issued in India or his billing address is in India or the internet protocol address of the device used by him is in India or the telephone used by him has an Indian address. All service tax registered assessees shall be considered as recipients under the B2B category liable to pay service tax under reverse charge.

Where the foreign service provider doesn't have an office in India, it can explore the option of appointing an agent to manage the compliances. Any person representing himself as the foreign service provider shall be obliged to manage the compliances and pay tax. Detailed procedures have been prescribed under Circular No 202/12/2016-ST all dated 9th November, 2016. Foreign service providers need to check if they are providing services to Indian non-assessee recipients and if that is the case, they would need to take registration in India.

Separately, the concept of intermediaries has also been specifically mentioned wherein any intermediary (unless he satisfies the required conditions) engaged in providing OIDAR services on behalf of the service provider shall be deemed to be providing such services to the Indian consumers. What is also important to note is that internet service providers (ISPs), credit card companies, application stores (itunes, Google Play store etc) shall not be considered as OIDAR service providers.

Set-ups providing electronic services would now need to analyse whether their services would get covered under the enlarged OIDAR service net. The Indian corporate houses procuring OIDAR services from foreign service providers were currently not paying Service tax. Those businesses that have an output service tax liability may be able to avail CENVAT of such newly introduced Service tax paid under reverse charge and may not be too impacted fiscally.

Companies operating in goods/retail/trading and not having any/enough service tax liability shall get impacted. Service tax paid under reverse charge will adversely impact their bottom line in addition to managing the additional compliances.

Individual consumers consuming data/voice/music on the internet would now need to shell out more because the foreign service provider shall start charging Service tax of 15% on such downloads.

Many websites sell digital content over the internet and generally have no presence in India. All such websites would now need to take Service tax registration, pay taxes (subject to threshold limits) and file returns. The threshold limit of Rs 10 Lacs for payment of tax would be available even to foreign service providers.

Foreign OIDAR service providers would now need to ask the service recipients their Service tax registration nos. In case the recipient doesn't have/provide the STC, the liability to charge Service tax shall vest with the service provider.

Though this amendment brings foreign service providers within the ambit of Indian taxes, it brings some cheers to Indian OIDAR service providers. The Indian service providers shall not get taxed from December 1st as the place of consumption of service will be outside India. This means increased margins for those service providers who were taking a hit of the service tax in their bottom lines in the absence of customer agreeing to pay Indian Service tax. Alternatively, this could also make the service offerings of Indian service providers competitive in the absence of any such tax now being charged.

This amendment is in line with the international principles enunciated by OECD on applicability of VAT on cross border sales, particularly related to B2C transactions. Even the model GST law provides for taxability of these services under the recipient based model.

This amendment is likely to have far reaching impact on the foreign service providers not having a presence in India. Online education websites like Udemy, Coursera etc and other branded service providers such as Fiverr would need to analyse the impact of these amendments on their operations in India. Should they get taxed under the new provisions, they would need to either appoint someone to manage compliances on their behalf or perhaps open an office to manage such changes.