Service Tax for Internet Based Services in India from December 2016

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By Koushan Das

Overseas companies providing online information and database access (‘OIDAR’) services will have to pay service tax from December 1, 2016, making electronic services potentially costlier for consumers. The Central Board of Excise and Customs (CBEC) defines OIDAR to include services delivered via information technology (over the internet or an electronic network), which is essentially automated involving minimal human intervention.

Before the amendment, cross-border OIDAR services were taxed in the country of the service provider, and thus, overseas providers providing services to Indian customers were not liable to tax; however, Indian providers had to pay tax.

As per the new service tax legislation, in case of business-to-consumer (B2C) services, the liable party will be the overseas service provider providing services to the government, a local authority, a governmental authority, or an individual in relation to any other purpose other than commerce and business. For business-to-business (B2B) services, the liable party will be the Indian consumer who is the recipient of such services under the reverse charge mechanism i.e. the business entity receiving the services will pay tax under reverse charge.

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OIDAR’s Ambit Widened

The new amendment includes electronic services such as internet advertising, cloud services, transfer of data or information, digital content (movies, music, e-books, and software), data storage, online distance learning, use of search engines, and online gaming.
Internet service providers (ISPs), lawyer and financial consultations by email, educational or professional courses delivered by a teacher over the internet, and credit card companies have not been included as OIDAR service providers.

In case an overseas provider has an intermediary, who only facilitates the cross-border delivery of services to consumers but neither has the authority for delivery or charging the consumers, the responsibility will fall on the service provider to collect taxes from consumers. In the case of online sellers of applications or software from third party developers, the online seller will be liable to pay taxes and not the third party application developer.

Who will be the Service Recipient?

Overseas service providers will not always be able to identify if the service recipient is liable to pay tax, as it is not necessary for a recipient to be a resident. The amendment has conditions which, if fulfilled will deem the recipient as being in taxable territory. These conditions are if the recipient has a local internet protocol address, holds a credit/debit card issued in India, or has a local billing address or phone number.

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Overseas Providers Can Pay Taxes by Various Means

Foreign service providers for B2C transactions will be responsible for collection of service tax and remitting the same to the Indian government. To do so they can either find an agent or a company representative or establish a local entity for tax submission. Finding an agent or having a representative will be an easier solution for the companies rather than setting up a local entity. Companies can register and submit taxes through the ACES (Automation of Central Excise and Service Tax) portal as well.

Indian Service Providers Welcome Change but Consumers Wary of Higher Price

This change may force foreign digital content providers of applications, music, movies, and e-books such as iTunes and Google Play Store that target individual consumers to pass on the increased costs to consumers. Indian businesses availing such services need to consider now, if and which services they procure fall under the purview of OIDAR since there were no such liabilities previously.
Nevertheless, the move will ensure a level playing field as earlier only Indian service providers bore such costs for customers not paying service tax. Consequently, it will facilitate more competitiveness and better margins for Indian service providers. This amendment closely follows the EU’s 2015 guidelines for cross-border transactions and the Goods and Services Tax (GST) framework in India.

Note: Central Board of Excise and Customs OIDAR Circular

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