service tax

In this article, Anupam Pillai who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses service tax in India on Overseas Online Services being Accessed From India.

Introduction

  • Ever imagined how easy it is to get a million results in just one click? This is possible with advent of internet and how beautifully it has been proved to be the best source of information. Then while all the services on internet seem to be free, yet there are few which being premium services come at a premium price.
  • But with services there comes tax into play to have checks and balances for the revenue generated from such services. In simple terms such tax is referred to as Service Tax.

With upcoming online services such as Netflix and other downloadable sites, there has been a paradigm shift in the service tax regime.

  • This paper essentially deals with the change in service tax scenario for overseas online services being accessed in India, in light of recent amendment in the Place of Provision of Services Rules, 2012 (‘PoPS’). Before getting into the detailed overview of the same, it is quite necessary to understand essentials of service tax in India and how these PoPS come into play.

Overview of Service Tax In India

  • Service tax is governed by Finance Act, 1994 along with other subsequent amendments carried by the Finance Acts. Service Tax is applicable on the services provided by a service provider and is usually paid by the Service recipient unless otherwise situation arises. Taxable event for the purposes of Service Tax refers to the ‘Services’ as defined in Section 65B(44) of the Finance Act, 1994, which has been amended timely and now tax is to be levied on any kind of service except the one being exempted under the ‘Negative List’.[1]
  • There has been a paradigm shift in the Service Tax regime as before Finance Act, 2012 was enacted, there were merely few services on which it was applicable, thus having a Positive List approach, but after enactment, there were 119 services, and few services as per Section 66D, there are few services which are exempted from Service Tax.[2]

Taxability of Services in India

There are following pointers to explain taxability of any service in the territory of India:

  1. Taxable Services can be put down as Services as per Section 65B(44) which includes Declared Services as per Section 66E excluding Negative List as per Section 66D and any other notification thereof.[3]
  2. In addition to Services under Negative List, certain services are exempt from ST vide notification no.25/2012 dated 20.06.2012 as “Mega Exemptions”.[4]
  3. In order to determine incidence of tax and the time when any service is deemed to have been provided, The Point of Taxation Rules, 2011 shall be applicable.[5]
  4. To determine whether any service has been provided in the taxable territory or not, Place of Provision of Services Rules, 2012 is applicable, which describes the rules to classify place of providing any service and incidence of ST thereof.[6]
  5. Mostly service provider is liable to pay tax but in certain cases, the Service recipient shall be liable to pay the same. This is known as “Reverse Charge Mechanism”.
  6. Service Tax is not payable upto taxable income of Rs. 10,00,000/- in a Financial Year and if turnover of the said income in previous FY is less than the threshold of Rs. 10 Lakhs.

Rate of Service Tax

  • As per the Finance Act, 1994, Service tax has to be paid by the service provider while for providing any service at the rate mentioned under Section 66B, which shall be collected from service recipient.[7]
  • But the government may notify services as per Section 68(2), in which case it shall be paid directly by the service recipient. The charge of Service tax till 2015 was at rate of 14% but currently, with effect from June 1, 2016, Krishi Kalyan Cess at 0.5 percent has been added along with Swachh Bharat Cess  0.5% as well, making it to 15%.[8]

Service Tax Implications on Online Services in India

As discussed above Service tax shall be applicable vide Finance Act, 1994 and accordingly the determination of the applicability is guided by PoPS. The said rules under PoPS categorically mentions the place of provision. The Service Provider is the one who provides the services and Service Recipient is the one that receives the said service.

  • Central Board of Excise and Customs released four service tax notifications in Circular No. 202/12/2016-Service Tax, dated November 9, 2016 (‘Circular’)[9] which came into effect on 1st December, 2016 which amended the PoPS whereby Online Information and Database Access or Retrieval (‘OIDAR’) provided by the Service Provided located outside India as per Rule 2(l) of PoPS.
  • Pre-amendment these OIDAR were not taxed when Service Provider located abroad used to provide Service Recipient located in India. The definition under Rule 2(l) of PoPS has been amended to include more services like advertising on the internet, which were not considered earlier.

We will go through two different aspects of the Service Tax implications for said services. pre and post amendment in the PoPS and other notifications.

1. Pre-Amendment Scenario

As discussed above we need to determine whether the service falls under the ‘negative list’ provided under Section 66D of the Finance Act, 1994. All services except those under the negative list are taxable.

Further it becomes important to determine whether the service is provided in the ‘taxable territory’, i.e., India except the State of Jammu and Kashmir. The place of provision of a service is determined as per rules set out in the POPS Rules. A service is taxable in India if its place of provision is in India as per the POPS Rules. Generally, the place of provision of a service is the location of the service recipient, subject to specific exceptions under Rules 4 to 12 of POPS Rules.[10]

Earlier, all cross-border B2C (Business to Consumer) services were exempted from service tax. B2C are services provided in India to the Government, local authority, governmental authority or an individual, in relation to any purpose other than commerce, industry or any business or profession. On the other hand, as per Notification No. 30/2012-Service Tax (‘Reverse Charge Notification’), cross-border B2B (business to business) services are taxable under a reverse charge, i.e., the service recipient is liable to pay service tax. In view of Rule 9 of the PoPS Rules, OIDAR services (among others) have been specified as an exception to the General Rule and are deemed to be provided at the location of the service provider. Hence, all cross-border OIDAR services provided to Indian residents, whether they are B2B or B2C services, were exempt from service tax.

Further, OIDAR services are defined in Rule 2(l) of the POPS Rules as “providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network“. This definition did not illustrate the services which are taxable or not. But post amendment it has included the services which are taxable and what services are exempted.[11]

2. Post amendment Scenario

There are following changes which have been carried out by the Circular,

a) Definition of OIDAR service

OIDAR services have been assigned the same meaning as under clause (ccd) of sub-rule 1 of Rule 2 of the ST Rules, which defines OIDAR services as services which are conveyed through the medium of data innovation over web or an electronic system, and by nature they are totally computerized services including negligible human component, to the degree that their conveyance can’t be guaranteed without information technology. This is a takeoff from the present comprehension of OIDAR services. The definition further provides that OIDAR services include –

  1. advertising on the internet;
  2. providing cloud services;
  3. provision of e-books, movie, music, software and other intangibles via telecommunication networks or internet;
  4. providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network;
  5. online supplies of digital content (movies, television shows, music, etc.);
  6. digital data storage; and
  7. online gaming.[12]

The Circular further elaborates the new meaning of OIDAR services and provides an indicative list of OIDAR services which includes website and web-page hosting, distance maintenance of programmes and equipment; supply of music, films and games, images, text and information etc remote systems administration; supply of software and updating thereof.[13]

However, the Circular also states that using the internet or some other electronic means of communication just to communicate or facilitate the service does not always qualify as an OIDAR service. An indicative list of non-OIDAR services includes supply of goods, where the order and processing is done electronically, supply of physical books, newsletters etc., services of lawyers and financial consultants advising over email, booking services for entertainment events, hotel accommodation etc., educational or professional courses, where the content is delivered over internet or electronic network, advertising services in newspapers, posters, and television.

b) Place of Provision of OIDAR services

The place of provision of OIDAR services has been shifted from ‘location of the service provider’ to that of ‘location of service recipient’.  Hence the cross-border OIDAR services provided in India shall no longer fall under Rule 9 of POPS Rules and accordingly, be taxable.

c) Treatment of B2B and B2C services

The exemption which was earlier available to all cross-border B2C services provided in India has been removed for cross-border B2C OIDAR services. In case of B2B OIDAR services are received from outside India, the recipient (who has been registered under Service Tax law in India) then tax shall be paid under reverse charge mechanism. Further the B2C OIDAR services to be taxable by service provider, the services need to be provided to ‘non assessee online recipient’ which includes individuals, government authorities, local bodies etc. located in India and receiving such OIDAR services.

d) Reverse/Forward charge

By amendments in the Service Tax Rules, 1994 (‘ST Rules’) and the Reverse Tax Notification, cross-border OIDAR services provided in India are made taxable under a reverse charge in case of a B2B service, and a forward charge in case of a B2C service.

Furthermore, for any cross-border OIDAR service, the service recipient should be esteemed to be situated in India if any of the two indicated non-contradictory conditions are fulfilled. These conditions identify with proximity of specific considers India including recipient’s address as exhibited by him by means of net,  issuance of his billing card, his billing address, internet protocol address of device used by him, etc. [14]

e) Intermediary service

In the event that an intermediary, for example, an electronic site, broker, agent and so on situated outside India encourages the arrangement of a cross-border B2C OIDAR service without giving the primary administration for him, such go-between might be esteemed to get such services from the service provider outside India and giving such support of the client in India, in this way being subject to pay service tax impose on a turnaround charge premise. In any case, this considering fiction won’t make a difference if the intermediary effectively sets up that he is just a go-between by fulfilling some particular conditions which are –

  1. The intermediary’s invoice to the client unmistakably distinguishes the service being referred to, the fundamental service provider and his registration in India;
  2. Intermediary neither gathers or procedures the service in any way nor is in charge of service between the service provider and the recipient;
  3. The delegate does not approve delivery; and
  4. The general terms and conditions are set by the service provider and not by the intermediary. On satisfaction of all the above conditions, the liability to pay service tax will fall on the main service provider.[15]

Impact of Amendment on Service Tax Regime in India

  • With this amendment in place, there has been a drastic change in the applicability of Service Tax on the overseas online services provided by the intermediaries or providers alike. The most important change has been in the definition of OIDAR services which has opened huge gates for the taxability of the services. This definition has seen a paradigm shift from the earlier definition which has been put forth in an Education Guide published by CBEC as services in relation to online information and database access or retrieval or both, in electronic form through a computer network.[16]
  • As per the Education Guide, the earlier definition covers services such as web-based services providing access or download of digital content, subscription to online books and journals, social networking sites, digital books, online news, flight information and weather reports, etc.
  • However, after the Notification, potentially all automated services involving minimal human element provided over internet would come under the blanket of OIDAR services, which as per the new definition also specifically includes “advertising on the internet”.[17]
  • Further, the old definition of OIDAR only forms one of the 7 items of the inclusive list [item (iv)] provided in the new definition, which includes additional services such as online gaming, cloud services, digital data storage, online supplies of digital content, etc. Moreover, as per the Circular, while purchase and automated delivery of digital content would be an OIDAR service, supply of tangible goods where the order and processing is done electronically will not be covered under OIDAR services.[18]
  • Another change is with respect to the clause (a) of Entry No. 34 of Mega Exemption exempts service tax on service received 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 from a person located in a Non Taxable Territory. It is important to note that the above entry exempts all type of import services for non-business use received by above mentioned persons.

The notification no 47/2016 withdraws the OIDAR service exemption by inserting a new proviso to this entry reads as under,

“Provided that the exemption shall not apply to online information and database access or retrieval services received by persons specified in clause (a).”[19]

  • It means that import of OIDAR service for non-commercial use by abovementioned persons from Non Taxable Territory to Taxable Territory would not be exempted from service tax. It is important to note that, before this amendment, exemption entry was not operative for OIDAR service, as the place of provision of such service was not in the TT.
  • This clause was applicable for other services, but amendment in the PoPS rules results that the place of provision would be the location of service receiver, therefore, this clause become operative for this service after amendment in PoPS rules.[20]
  • The extension of service tax for overseas online services is in line with the recommendations for addressing indirect tax challenges in a digital economy suggested by the OECD in the Action Plan of its flagship project on Base Erosion and Profit Shifting (‘BEPS’).
  • The Action Plan 1 suggests that cross-border online digital services should be taxed in accordance with the destination principle in the country in which the consumer is located. Hence, this confirms to global consensus at taxing online services in the destination jurisdiction.

It is also pertinent to know the impact of the new Equalisation Levy (‘Levy’) on the expanded scope of service tax. The Levy which has been introduced as  6% tax on gross payments made by Indian businesses to non-resident enterprises for online advertisements overlaps with service tax. This overlap may be significantly wider in the future because the Levy may potentially be expanded to cover many more online services such as cloud services, provision of e-books, movies, online gaming etc.[21] Hence, there is a case to be made for repealing the Levy in light of the fact that the services it seeks to cover have already been covered under service tax.

Conclusion

The circular has created a clear picture about the service to be accessed in India and tax payable thereof for any such service provided by overseas service provider. This has further led to understand the determination of place which shall be applicable for tax treatment and that more emphasis shall be on the nature of services provided apart from the location merely.

Further that this amendment has far reaching implication on the online service providers such as Netflix which needs to get service tax registration in India in order to file returns.

This shall further lead to more B2C services being provided to the customers across country and that shall lead to more competition between the online intermediaries to provide better services to the customers.

The essence of this amendment lies in the fact that such changes shall be adaptive to the Indian web surfers which is still missing as they are keen to use free torrent and other unpaid sources, unlike the ones proposed to be used. In that case there comes another question whether the said act of government to charge service tax on online services is a boon or bane? This shall be answered only in due course and that favorable situations of that of demonetization shall fuel the increase in use of digital payment gateways and services alike. Thus this amendment seems to be most promising step taken by government in a while.

References

[1] Service Tax Procedures, available at http://www.cbec.gov.in/htdocs-servicetax/st-proc-home?pageID=4-11

[2] Service Tax at a Glance, available at  http://www.cbec.gov.in/resources//htdocs-servicetax/ovw/ovw1-1_st-ataglance-19may16.pdf

[3] Handbook on Service Tax, available at http://www.cefi.in/wp-content/uploads/2014/09/Deloitte_Service-Tax-in-India.pdf

[4] Notification No. 31 of 2016, available at  http://www.cbec.gov.in/htdocs-servicetax/st-notifications/st-notifications-2012/st25-2012

[5] Point of Taxation Rules, 2011, available at http://www.cbec.gov.in/htdocs-servicetax/pt-of-taxtn2011

[6] Place of Provision of Services, 2012, available at http://www.cbec.gov.in/htdocs-servicetax/st-rules-placeof-provsn-services

[7] Section 68, Finance Act, 1994

[8] Supra Note 4

[9]Circular No. 202/12/2016-Service Tax, dated November 9, 2016 available at http://www.cbec.gov.in/htdocs-servicetax/st-circulars/st-circulars-2016/st-circ-202-2016

[10] Rule 3, PoPS

[11] Rule 2(l), PoPS

[12] CBEC Notification 46/2016 on Place of Provision of Services Rules, 2012

[13] Circular No. 202/12/2016-Service Tax, dated November 9, 2016 available at http://www.cbec.gov.in/htdocs-servicetax/st-circulars/st-circulars-2016/st-circ-202-2016

[14]Change in Service Tax Treatment in India, PWC, available at https://www.pwc.in/assets/pdfs/services/tax/indirect_news_alert/2016/pwc_news_alert_11_november_2016_change_in_service_tax_treatment_b2b_and_b2c.pdf

[15] Service Tax To Be Paid For Foreign Entities In India, RSM India available at

 https://www.rsm.global/india/sites/default/files/media/RSM%20India/Publications/December%202016/nf service_tax_payable_by_foreign_entities_on_cross-border_b2c_oidar_services.pdf

[16] Taxation of Services: An Education Guide, June 20, 2012, CBEC, Department of Revenue, Ministry of Finance, Government of India. available at  http://www.cbec.gov.in/resources//htdocs-servicetax/EducationGuide.pdf

[17] Notification No. 46-2016-ST dated 9.11.2016 available at http://www.cbec.gov.in/resources//htdocs-servicetax/st-notifications/st-notifications-2016/st46-2016.pdf

[18] Circular No. 202/12/2016-Service Tax, dated November 9, 2016 available at http://www.cbec.gov.in/htdocs-servicetax/st-circulars/st-circulars-2016/st-circ-202-2016

[19] Notification No. 47-2016-ST dated 9.11.2016 available at http://www.cbec.gov.in/resources//htdocs-servicetax/st-notifications/st-notifications-2016/st47-2016.pdf;jsessionid=DB0162FE48148F83BE86CCF35C5DCA42

[20] Cross Border Online Services: A Drastic Amendment, available at http://www.caclubindia.com/articles/cross-border-online-services-a-drastic-amendment-28244.asp

[21] Proposal on Equalization Levy Specified Transactions available at http://incometaxindia.gov.in/news/report-of-committee-on-taxation-of-e-commerce-feb-2016.pdf

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