The availability of cheaper and feature-rich cell phones along with the penetration of low-cost internet in rural India fuelled by the Digital India campaign, has pushed service providers to transform the way services are delivered and as a result, the players in advertising, media, education and gaming have grown exponentially over the last few years. Considering the size of the Indian market and growing demand in these sectors, several overseas entities are investing in India and rendering services digitally to Indian customers.
The levy of tax on Online information and Database Access Service (OIDAR) was introduced in India in 2001 under the erstwhile service tax regime and in 2016 the ambit of services was widened to include several digital services into the tax fold. In July 2017, the GST law borrowed the provisions governing OIDAR from the service tax law.
OIDAR is a category of services provided digitally through the medium of the internet and received by the recipient without a physical interface with the supplier of such services. The nature of OIDAR is such that it can be provided online from even a remote location outside India to a customer in India.
The GST law defines OIDAR in clear terms and also enlists certain illustrative services such as advertising, cloud services, e-books, movie, music, software, data/information retrieval services, data storage and online gaming services rendered through online/internet mediums. Any overseas supplier involved in the rendition of such services to a customer in India shall follow a simplified registration process under the GST law, either directly or through the appointment of a representative in India and follows routine monthly compliances.
The Government as part of the amendments proposed in the Union budget 2023-24 has broadened the scope of OIDAR services, by removing the term 'essentially automated and involving minimal human intervention' from the definition of OIDAR services. This would essentially mean that even if the services are not totally automated and involve human interactions through online/internet mediums for the rendition of services, the services will get qualified as OIDAR services.
It would be important to highlight that several overseas educational institutions started conducting online education programs and considered their services as not qualifying under the OIDAR category as the education courses involved regular human interactions. However, the proposed amendment in the definition of OIDAR services would require such overseas service providers to revisit their tax position.
In addition to the above amendment, the Union budget 2023-24 has also amended the definition of 'non-taxable online recipient', wherein the scope has been widened. The proposed amendment would make OIDAR services taxable in the hands of the overseas supplier (or intermediary as applicable) if any unregistered person or persons registered under Section 51 of the CGST Act in India, receives OIDAR services for any purpose.
Any overseas entity rendering services to customers in India would be required to conduct the following key tests to determine the taxability of the transactions in India under the OIDAR provisions:
- Whether the transaction qualifies as an OIDAR
- Whether the entity qualifies as a 'Non-Resident Taxable Person' in India
- Whether the services are rendered to any person who is not a GST registrant in India or to a person registered solely for deducting tax under section 51 of the CGST Act
- Whether services are rendered by the overseas service provider directly through its website to end customers located in India
- Whether the digital services are rendered through applications downloadable through third-party app
- Whether GST is discharged by a third-party app service provider on behalf of the overseas entity.
Further, considering the growing demand for OIDAR and ease of delivery of such technology-enabled services, it is imperative that the Government addresses various challenges faced by the sector, including the following, which would also help optimise revenue to the exchequer and ease operations for service providers.
- Create awareness - The lack of awareness of the OIDAR provisions is a key challenge that compels GST authorities to issue notice to demand tax, interest, and penalty on overseas suppliers. Several overseas suppliers were issued notices to their dismay where tax along with interest and penalty were recovered for non-compliance. In some instances, certain overseas entities have decided to discontinue services to a customer in India due to unexpected tax costs. To tackle this challenge, the Government shall establish a suitable system and robust technology to monitor the supply of OIDAR upfront and create awareness among overseas entities rendering services to customers located in India. This would enable the overseas service provider to remit GST by appropriately collecting the taxes from the customers, rather than bearing GST and rendering the business infeasible.
- Challenges involved in registration, tax payment and compliances – Allow overseas suppliers to obtain a GST registration with the least possible documentation and convert the existing monthly compliance requirement to quarterly or half yearly to reduce the compliance burden.
- Amnesty or tax settlement process – Provide an amnesty or tax settlement mechanism to overseas businesses engaged in the supply of OIDAR. The companies who had not collected taxes from end customers due to a lack of awareness may be afforded a onetime dispute settlement option for the initial years of GST, which would encourage them to come clean with respect to past dues.
While 'Ignorance of the law is no excuse', the purpose and object of the law are not to multiply ignorant defaults or loose/delay revenue! It reminds us that 'there is a true law, right reason, agreeable to nature, known to all men, constant and eternal, which calls to duty by its precepts, deters from evil by its prohibition'.
Source : The Economic Times