An email, in the nature of an information flyer, is being sent to these offshore business-to-customer (B2C) entities by the Bangalore nodal office of Central Board of Indirect Taxes and Customs which administers the common indirect tax which came into effect from July 1, 2017.
Several companies whose platforms are being used by Indian residents for entertainment, trading as well as educational purposes have so far received the communique from the tax office.
“While the Indian revenue is educating foreign online service providers on the mandated compliances, it is equally important to incentivise these foreign corporations to carry out compliances — providing amnesty for the past taxes along with interest and penalties would go a long way in enabling these corporations to commence compliances in India,” said Uday Pimprikar, National Leader, Indirect Tax, EY.
Two years ago some of the overseas companies who were unaware of India’s new tax, were put off by notices from the tax department. While many foreign companies complied and paid the tax to close the matter, some of them had then questioned the practice of serving notices or summons via emails. “The overseas entities were of the impression that such communications, in accordance with international law, must be routed through their respective governments, as the local tax department does not have the jurisdiction,” said a lawyer specialising in taxation of digital services.
Unlike the Rs 20 lakh threshold for levy of GST on domestic entities, the tax is applicable on various cross-border services irrespective of any cut-off amount.
Discover the stories of your interest
A 15% penalty can be imposed by the tax office if it believes that the GST was “intentionally avoided”. Some of the companies forked out the penalty — as the amounts were not significant enough to initiate litigation — but they were upset for having been categorised as `tax evaders’ because home country regulations could require them in future to disclose the information in some of the regulatory filings.
The services targeted by the GST office come under the category of Online Information Database Access and Retrieval (OIDAR) services which are sold over the internet and received by recipients online without having any physical interface with the supplier of such services. As per this definition, GST is applicable on automated services involving minimum human intervention. Under the circumstances, services in the form of a recorded educational video or gaming platform or even an offshore cryptocurrency trading platform could attract GST; however, it cannot be imposed on a live classroom session held by an overseas university.
Thus emails have so far been sent to foreign B2C players. If services are bought by registered business entities in India, then the recipient of the service is liable for payment of GST as OIDAR services are under the list of `Reverse Charge Services’ rules of GST. While under GST goods or services are taxed at the place of consumption, Reverse Charge means that the liability to pay tax is on the recipient of supply of goods or services instead of the supplier for notified categories of supply.
The GST on OIDAR bears certain similarities to the 2% ‘equalisation levy’ (EL) — introduced in Finance Act 2016 and broadened in 2020 — to address the tax challenges posed by the increased digitalization of the economy. While EL was proposed to tax businesses which pay no income tax in countries where their markets lie, a non-resident business entity cannot offset the EL outgo against the income tax (if any) it pays in its home country. However, GST as well as EL raise the cost of overseas services received by consumers in India.
