OIDAR services - Service Tax based on destination principle of GST

The authorities, vide notification number 46/2016-ST, 47/2016-ST, 48/2016-ST and 49/2016-ST dated 9 November 2016, have brought in significant changes in the taxability of Online Information Database Access or Retrieval Services (OIDAR). These notifications shall come into force on 1 December 2016. The key amendments of these notifications are summarised below:

1.    New definitions inserted under Service Tax Rules

• OIDAR has been defined to mean services whose delivery is mediated by information technology, over the internet or an electronic network. The nature of these services are such that its supply would be automated involving minimal human effort and includes electronic services such as advertising on the internet, providing cloud services, online gaming, digital data storage, online supplies of digital content, provision of e-books, movies, music, software and other intangibles via a telecommunication network or internet, etc.
  
  Examples of OIDAR: Website hosting, online downloading of software/desktop themes, online news/traffic information/weather reports, automated online distance teaching, etc.
  
  Examples of services not under OIDAR: Supply of goods, where the order and processing is done electronically, supply of physical books/newsletters/newspapers/journals, advisory services provided by lawyers and financial consultants through email, etc.

• The term ‘Non-Assessee Online Recipient’ (NAOR) covers the government, a local authority, government authority or an individual located in a taxable territory and receiving OIDAR services for purposes other than commerce, trade, industry, business or profession under its ambit. Accordingly, end consumers who utilise such services for personal purposes and the government or any of its agencies would be covered under NAOR.

 

2.    Amendment in Place of Provision of Service Rules and Mega Exemption Notification

• OIDAR services have been omitted from Rule 9 of the Place of Provision of Services Rules. This would mean that the place of provision of service in case of OIDAR would no longer be determined based on the location of the service provider and may be determined based on the location of the service receiver. Thus, OIDAR services provided by a person located outside India would attract service tax levy.
• Further, exemptions have been provided to services received from a person located in a non-taxable territory by the government, a local authority, a government authority or an individual for non-business use is withdrawn for OIDAR services.
• Also, the taxing mechanism in the case of B2B and B2C transactions is prescribed differently.
   

3.    Person liable to pay service tax

• If the service provider is located in a taxable territory (India), the person liable to pay the tax is the service provider.

• If the service provider is located in non-taxable territory (outside India), the taxing mechanism is as per the table below:

Type of transaction	Service Provider (SP) located outside India	Service Receiver (SR) located within India	Taxing mechanism	Person liable to pay service tax
B2B	SP located outside India	Other than an NAOR	Reverse charge	Service receiver
B2C	SP located outside India	NAOR	Forward charge	SP located outside India
	SP has representative in India	NAOR	Forward charge	Representative of SP in India
	SP does not have a physical presence or representative in India but has appointed a person for the payment of service tax	NAOR	Forward charge	Person in India appointed by SP for the payment of service tax
	SP has an intermediary located outside India (such as agent, electronic platform, etc.)	Intermediary* of the service provider deemed to be receiving such services and providing it to an NAOR	Forward charge	Intermediary of the Service Provider

*If the intermediary fulfils certain conditions as prescribed (the intermediary does not collect the payment and does not authorise delivery, etc.), he will not be deemed the service provider of OIDAR services.
 

4.    Determining the service recipient’s location

• A service recipient receiving OIDAR services from a service provider located outside India would be deemed to be located in a taxable territory if any two of the following key conditions are satisfied:

• The location of the address presented by the service recipient via the internet is in the taxable territory;
• The service recipient’s billing address is in the taxable territory;
• The IP address of the device used by the service recipient is in the taxable territory; and
• The credit card, debit card, smart card, etc. used by the service recipient for the purpose of payment has been issued in the taxable territory.

 

5.    Separate procedures prescribed for OIDAR service providers

• OIDAR service providers located in the non-taxable territory (outside India), providing services to any person located in the taxable territory, would be required to make an application for service tax registration in Form ST-1A.
• Registration is to be provided to such service providers in Form ST-2A.

The Service Tax Return is to be filed by such service providers in Form ST-3C.

Our comments

The services which were currently outside the service tax net such as data storage, cloud servers, online gaming, etc. provided by a person located outside India have been brought under the service tax levy. Thus, the new provisions have not only redefined the meaning of OIDAR services but also widened the coverage of service tax.

Given the amendment in the definition of ‘OIDAR services’, companies providing services through an electronic medium would now be required to evaluate whether their business activity would qualify as an OIDAR as per the new definition. Also, companies who are currently qualifying as OIDAR service providers will be required to revisit their tax position to evaluate whether they would continue to qualify as OIDAR service providers.

We have tabulated the impact on OIDAR services under the current regime and as per the new provisions below:

Service provider (SP)	Service receiver (SR)	Type of transaction	Current regime	New provision	Person liable to pay service tax
Outside India	In India	B2B	Not taxable	Taxable	SR
In India	Outside India		Taxable	May qualify as export subject to other conditions	Exports are zero-rated
Outside India	In India	B2C	Not taxable	Taxable	SP or his intermediary or representative
In India	Outside India		Taxable	May qualify as export subject to other conditions	Exports are zero-rated

As per the new provisions, in B2C transactions, as service providers located outside India are now responsible to pay service tax, for administrative ease, a facility has been provided whereby such foreign service providers can appoint representatives in India who can pay taxes and undertake compliances.

Furthermore, in the case of B2B transactions, the service receiver located in the taxable territory is assigned the responsibility to discharge service tax if OIDAR services are provided by the service provider located outside India.

Though the above provisions appear to be in line with the introduction of the destination based consumption Goods and Service Tax (GST) regime in India, the implications, including procedures/compliances of such service providers under the GST regime, would need to be analysed again.