In a bid to increase its tax base and to increase revenues from Indirect taxes, the government of India has decided to levy service tax on the provision of a plethora of SAAS and content services from outside of India to customers located in India, including online advertising, providing cloud services, purchase of online content, software, storage, gaming etc.
The government has amended key provisions in the rules that determine taxability of services provided in non-taxable areas (Place of Provision of services rules) to bring electronic services under the service tax net. With effect from the 1st of December 2016 such services shall be subject to service tax at the rate of 15% and such tax shall have to be collected by the services provider and deposited with the government on a periodic basis.
So which services do we have to pay tax on now?
“online information and database access or retrieval services is defined as any service whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology.
This includes services such as:
- advertising on the internet;
- providing cloud services;
- provision of e-books, movie, music, software and other intangibles via telecommunication networks or internet;
- providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network;
- Online supplies of digital content (movies, television shows, music, etc.);
- digital data storage; and
- online gaming;‟
Companies impacted by the amendment include Google, Facebook, Microsoft, Amazon, Spotify, Netflix, Drobox, Sony etc.
How exactly is this possible?
Well, the place of provision rules (“POP”) are used to determine the jurisdiction that has rights to tax a particular service. Therefore, the rules lays down how the place of provision of services is to be determined in the case of import or export of services. One of the key principles of indirect taxation is that a service is taxed in the jurisdiction in which it is consumed. In daily life however, it often becomes difficult to determine where exactly a service has been consumed. For example if you purchase a ticket from San Francisco to Delhi while sitting in London from a website based in India, which country would you have consumed the service in? Would it be the US where the flight originates? India, where the online booking company is located? Or would it be in the UK where you were at the time of the booking of the flight? Place of Provision rules help you and the tax authorities figure out on which services are you bound to pay taxes in India.
Okay, I get it. But what has changed with respect to online services?
This set of notifications issued by the ministry of finance makes two key changes to the POP rules. One it changes Rule 9 (place of provision of specified services). The place of provision of services covered under this rule is accepted to be the location of the service provider. Hitherto, the following services were included under Rule 9
- Services provided by a banking company/Financial Institution or an NBFC to account holders
- Online information and database access or retrieval services,
- Intermediary services, and
- Services of hiring all means of transport (other than Aircraft and vessels)
This meant that with respect to online information and database access or retrieval services, the place of consumption of services was the location of the service provider and therefore services received from foreign providers in India were not subject to Service tax.
The notification deletes “Online information and database access or retrieval services” from Rule 9 and adds it instead to Rule 1 which is the general rule of determination of place of provision and states that “the place of provision of a service shall be the location of the receiver of services” therefore services that fall under the head Online information and database access or retrieval services shall be subject to tax if the recipient of such services is located in India provided they are received by “non-assesse online recipient”
So who exactly is a non-assesse online recipient?
In layman terms a non assessee online recipient is a government body or, quite importantly, any person resident in taxable territories of India, who receives online services for personal use and not for business or profession. The exhaustive definition covers:
- a local authority,
- A governmental authority or
- an individual located in taxable territory and who are receiving online information and database access or retrieval services in relation to any purpose other than commerce, industry or any other business or profession,
How does this compare to import of services for business use?
A service is said to be imported into India when:
- the service provider is located in a non-taxable territory
- The service receiver is located in a taxable service
- The place of consumption of the service as per the POP rules is within a taxable territory
If the above conditions are satisfied the receipt of services by the Indian resident would be considered import of services and the recipient would be liable to pay 100% service tax on the value of the imported services.
The onus to deposit tax in this case would be upon the business receiving such services, in contrast to services rendered to non-assessable recipients where the service provider will have to collect and deposit taxes.
How are these companies to comply?
Businesses providing such services to Indian residents will have to register with the service tax department in Form ST1A and comply by:
- collecting and paying taxes on a monthly basis
- Filing Semiannual returns with details of services provided and taxes collected
How will it be determined that the service receiver is located in India?
The notification also lays down a mechanism for determining if a service recipient is located in India. As per the amended rules a person shall be deemed to be resident in India if he complies with any two of the following conditions:
- The address provided by the service recipient is in taxable territory
- The credit/debit/charge card etc. used for payment is issued in India
- The billing address of the service recipient is in taxable territory
- The bank account used for payment by the service recipient is in taxable territory
- The IP address of the service recipient is in taxable territory
- The country code of the SIM card of the service recipient is of taxable territory
- The fixed line through which the service recipient accesses the services is in taxable territory
Are there any issues with this amendment?
Plenty. For one it was always understood that electronic services were deemed to be consumed at the place from which they were rendered. This notification upends that assumption wholesale.
Secondly, what happens to the equalization levy that had been imposed only recently on payments made towards online advertising. Are businesses expected to bear both service tax as well as equalization levy or will equalization levy be phased out?
Third, how does the government plan to enforce compliance with this new provision? Does the bureaucracy think it can easily obtain customer information from foreign businesses who are not bound to disclose such information? How do they plan to crack down on the foreign businesses that do not comply with this requirement?
Four, tourists and travelers will find often themselves considered non assessee online recipients. How should the service provider filter between such travelers and those who are located permanently in a taxable jurisdiction?
Five, this provision does not adequately address the base erosion sought to be countered by imposition of additional taxes on foreign services providers. Indirect taxes in this case will eventually be borne only by Indian residents.
Arkay & Arkay Comments
With GST on the horizon, it would be fairly reasonable to expect a similar clause to be included with the GST regulations that are expected to come into force from April 2017. This provision makes little sense from our perspective as from an administration perspective it is quite simply very difficult to enforce. There is also the unanswered point on Equalization levies which will be coexisting with service taxes on online services. We had speculated that equalization levy may be extended to other online services over a period of time. Instead the government has brought all of them under service tax net en-masse.
Pallav Pradyumn Narang is a Chartered Accountant specializing in the Tax and advisory domains. He currently works as a Partner with Arkay & Arkay, Chartered Accountants, a Tax, Assurance and Advisory firm based out of New Delhi. He has previously worked with BMR Advisors and Grant Thornton. He tweets at @thepallav.