Introduction:
At present, cross border services received by any individual or by Government or local authorities which are not in relation to business or commerce are exempt from service tax. Online database, access or retrieval services (hereinafter referred to as ‘OIDAR services’) provided by entities located outside India are not subject to service tax as the law with respect to place of provision of these services envisages that location of service provider is the place of provision of service which will be outside India. Further, these services are defined in a confined manner limiting to activities of providing data or information which is retrievable or otherwise to any person through a computer network. This legal position has now undergone sizable change with effect from 01.12.2016 as discussed hereunder
Scope and Ambit of OIDAR Services:
The term, ‘Online Information, Database, Access or Retrieval Services’ was defined under Rule 2(l) of the Place of Provision of Service Rules, 2012. This definition is now withdrawn from these rules and a new definition is inserted under clause (ccd) of sub-rule 1 of rule 2 of the Service Tax Rules, 1994. The comparative analysis of both the definitions is as under;
Definition under Rule 2(l) of Place of Provision of Service Rules, 2012 (Withdrawn w.e.f 01.12.2016)
‘Online information and database access or retrieval services’ means providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network.
Definition under clause (ccd) of sub-rule 1 of rule 2 of Service Tax Rules, 1994 (effective from 01.12.2016)
‘Online Information Database Access or Retrieval Services’ means services 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 and includes electronic services such as
- advertising on the internet (ii) providing cloud services
(iii) provision of e-books, movie, music, software and other intangibles via telecommunication networks or internet
(iv) providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network
(v) Online supplies of digital content (movies, television shows, music, etc.) (vi) digital data storage
(vii) Online gaming
On a comparative study of earlier definition with the current definition, the earlier definition is limited to services relating to providing access to a repository of data/information held by service provider including retrieval of information through a computer network. The present definition provides that in addition to these services also includes within its ambit services like advertising on the internet, cloud services, online gaming services. These may not be technically called OIDAR services as the service provider need not possess a repository of data/information to provide these services but the new definition has specifically included these services within its ambit.
A circular No. 202/2016-ST dated 09.11.2016 is issued in this regard. Accordingly, it has been clarified that these services include supply of software, images, text, information, music, films website hosting etc. where the services are provided through computer network with minimal human intervention. It has also clarified that information shared through electronic means by human intervention viz. information commissioned individually or otherwise sent manually through email (other than system generated emails), video lectures with tutor support are covered under the ambit.
Place of Provision of OIADR Services:
Rule 9 of the Place of Provision of Services Rules, 2012 provides that the place of provision of specified services is the location of the service provider. OIADR services were one of the specified services. This rule is now amended to exclude OIADAR services from the specified services. As a result of this exclusion, the place of provision of OIADR services is governed by general rule i.e. Rule 3.
In terms of this Rule 3, the place of provision of services in general is the location of the service receiver. Where the location of service receiver is not available in the ordinary course of business (where services are of B2C nature), the place of provision of services is the location of service provider. Consequently, in case of B2B services i.e. services received by business entities, the place of provision of services are the location of service receiver.
Eg: XYZ Ltd of Hyderabad is using the services of linkedin.com to advertise for their recruitment needs. The service is of the nature of OIDAR and service provider linkedin.com is located in USA. As the service is provided between two B2B entities, the location of service receiver i.e. XYZ Ltd is the place of provision of service i.e. Indian taxable territory. Accordingly, said service is taxable in India.
Rule 3 is also undergone change with effect from 01.12.2016. Accordingly, in case of OIDAR services of B2C nature where the location of service receiver is not available in ordinary course of business, the place of provision of service will still be considered as location of service receiver instead of service provider.
Thus, in view of the above mentioned amendment to Rule 3 of the Place of Provision of Service Rules, 2012, the place of provision of OIDAR services shall always be considered as location of service receiver irrespective of the fact whether services are of the nature of B2B or B2C.
In view of the changed legal position, say in the above example instead of XYZ Ltd, say Mr. X of Hyderabad, an IT job aspirant has used the premium services of LinkedIn account in order to find better job offers that suits his profile, the service recipient though a non-business entity, still the place of provision of service shall be considered as location of service receiver. Accordingly, the saidservice becomes taxable in India. As to who has to pay tax in case of B2C scenarios is explained hereunder.
Taxability of Cross Border OIDAR Services received by non-business entities:
Entry 34(a) of Notification 25/2012-ST dated 20.06.2012 provides exemption for services received from a provider of service located in non-taxable territory by Government, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession. Now this notification is amended to ensure that this exemption is not applicable for OIDAR services received from a person located outside the taxable territory.
In view of exemption under entry 34(a), service tax is required to be paid for OIDAR services received by Government, local authority or a Governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession.
Applicability of Reverse Charge/Forward for Cross Border Services:
In terms of section 68 of Finance Act, 1994, service provider is required to collect and pay service tax to the Central Government (forward charge) and with respect to certain notified services, service receiver is required to pay service tax directly to Central Government(reverse charge). The notified list of services for reverse charge are given under Notification 30/2012-ST dated 20.06.2012.
Accordingly, in terms of this notification, any taxable service provided by a person located in non-taxable territory to a person located in taxable territory, the service recipient in the Indian taxable territory is liable to pay service tax in India under reverse charge. Now this notification is amended to provide that no reverse charge is applicable in case of online database access or retrieval services received by a non-assessee online recipient.
Non-assessee online recipient is defined for this purpose to mean Government, a local authority, a governmental authority or an individual receiving OIDAR services in relation to any purpose other than commerce, industry or any other business or profession, located in taxable territory. In fact these are the persons who are not entitled to exemption under entry 34(a) for OIDAR services received from a person located in non-taxable territory.
Thus in view of the above amendment, if cross border OIDAR services are received by a business entity (other than non-assessee online recipient) located in Indian taxable territory, reverse charge mechanism is applicable. Accordingly, the Indian business entity is required to pay service tax under reverse charge mechanism. In the above example relating to services received by XYZ Ltd from LinkedIn, USA, the service tax is required to be paid by XYZ Ltd under reverse charge.
On the other hand, in case non-business online recipient, no service tax is required to paid by Mr.X for receiving services from LinkedIn, USA. The applicable service tax in case of cross border OIADR services provided to non-business online recipient shall be subject to forward charge in the manner explained below:
|
Sl.No |
Nature of Service |
Person liable to ST |
|
|
|
|
|
1 |
Services are provided by a person |
Intermediary |
|
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||
|
|
located outside the taxable territory |
|
|
|
through an intermediary other than |
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|
|
specified intermediary* |
|
|
|
|
|
|
2 |
Services provided by a person |
Service provider located in non-taxable territory in |
|
|
||
|
|
located outside the taxable territory |
the following manner: |
|
|
through a specified intermediary* or |
(i) A representative if any exists in India to provide |
|
|
directly to the non-assessee online |
such services, such representative |
|
|
recipient |
(ii) In the absence of such representative, but |
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|
|
representative has been appointed in taxable |
|
|
|
territory for any other purpose, such |
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|
|
representative in India |
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|
(iii) In any other case, the service provider has to |
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|
|
appoint a person in taxable territory for the |
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purpose of service tax payment |
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|
Note: Specified intermediary is the one who satisfies all of the following conditions:
(a)the invoice or customer's bill or receipt issued or made available by such intermediary taking part in the supply clearly identifies the service in question, its supplier in non-taxable territory and the service tax registration number of the supplier in taxable territory;
(b)the intermediary involved in the supply does not authorise the charge to the customer or take part in its charge i.e. intermediary neither collects or processes payment in any manner nor is responsible for the payment between the non-assessee online recipient and the supplier of such services;
(c)the intermediary involved in the supply does not authorise delivery;
(d)the general terms and conditions of the supply are not set by the intermediary involved in the supply but by the service provider
The following table sums up the entire provisions relating to payment of service tax in case of cross border OIDAR services.
Conclusion:
Taxation of digital services is been undergoing rapid change over the last two years which has been identified as one major untapped area to collect taxes. The companies involved in this business are tapping huge revenue from the customer base in India but are not paying any direct or indirect taxes as they are located outside India. Introduction of equalisation levy under direct taxes, service tax payment under reverse charge by aggregator are the significant steps in this direction to ensure appropriate taxes are paid to Indian Government as the revenue is being generated from customer base in India. The changed legal position over OIDAR services where the non-resident service provider is obligated to pay service tax in India through authorised representatives can also be considered as one more major step in this regard to ensure that appropriate revenue to the Indian Government. Some more changes with respect to taxability of the digital services are expected.
