GST IMPLICATIONS ON DIGITAL SERVICES

The exponential rise of digitalization in the Indian economy has posed a formidable challenge in the realm of taxation, particularly concerning digital transactions. This challenge transcends national boundaries, creating a global conundrum within the legal and regulatory framework. In response, India has witnessed significant evolution in its taxation landscape for digital services, marked by the introduction of various provisions aimed at fostering compliance and equitable taxation. The proliferation of digital services underscores the necessity for a comprehensive grasp of both the Goods and Services Tax (GST) and the Income-tax Act, 1961, in ensuring compliance for service providers and participants engaging in digital interactions.

Digital services, also known as online services, comprising of various kinds of activities performed using electronic media, including software downloads, online advertising, streaming services, and cloud storage.

Cross-border transactions, with digital services offered by non-resident digital service providers pose a considerable challenge. These transactions carrying a wide range of online offerings, such as online advertising, software downloads, streaming services, etc. Thereby it becomes important for the businesses to find a solution that would help in compliance requirements and reducing taxability.

The Indian Finance Act 2020 has introduced an Equalization Levy on digital advertising and e-commerce operators. This levy encompasses digital services provided by non-resident operators engaged in operating or managing digital platforms. Under this act, an E-commerce Operator is defined as a non-resident entity that possesses, operates, or manages digital or electronic infrastructure or platforms facilitating online sales of goods or services.

Difference between GST and the equalization levy

It's important to distinguish between GST and the equalization levy, as they pertain to similar transactions but serve distinct purposes within separate legal frameworks. GST functions as a value-added tax applied to service supplies via Information technology within a country, while the equalization levy targets online advertising and related services offered by non-resident digital service providers.

Hence, a connection exists between GST and the equalization levy concerning specific cross-border digital services provided by the non-residents service providers.

Such digital services, which are delivered via the internet or electronic networks and depend entirely on information technology for their provision, fall under the category of Online Information & Database Access Retrieval (OIDAR).

Recently, tax authorities have been issuing notices to non-resident operators regarding the GST applicability under the scope of OIDAR services. It has been observed that the websites/applications of some foreign operators are albeing blocked in India. This trend indicates a move towards stricter tax enforcement, emphasizing the need for non-resident operators to align their GST compliance and equalization levy positions closely.

Hence, overseas businesses must reassess several critical factors from a GST standpoint to ensure alignment with the position taken regarding the equalization levy. These factors include the extent of human involvement in service provision, the participation of intermediaries in payment processing or customer interaction, and the GST registration status of end users etc.

OIDAR Definition Update

Starting from October 1, 2023, India has revised its definition of Online Information & Database Access Retrieval (OIDAR) services, eliminating the requirement for human involvement and essentially automated. Consequently, any service delivered through information technology or electronic networks, reliant on such technology, will now fall under the OIDAR services category. This modification represents a significant regulatory shift towards embracing a wider array of technology-based solutions within OIDAR classification.

Indian-based OIDAR service providers can register through the standard procedure on the GST portal. Meanwhile, those situated outside India must apply for GST registration using form GST REG-10 and submit it electronically along with the necessary documentation. Additionally, service providers must adhere to monthly GST return filings. Overseas OIDAR service providers are now obliged to submit Form GSTR-5A by the 20th of the following month, marking a significant change in tax compliance obligations.

The introduction of GST and Equalization Levy on digital services has substantially transformed the tax landscape. With the elimination of prior exemptions, overseas OIDAR service providers must now register under India's GST system and pay taxes when delivering services to unregistered recipients in India, in accordance with the evolving GST regulations. Taxpayers must also ensure compliance with Equalization Levy and GST applicability on digital services to avoid penalties and ensure smooth operations within the Indian tax framework.

Services Under OIDAR

Clearly, the taxation of Online Information and Database Access or Retrieval (OIDAR) services adds another level of complication. In essence, OIDAR services cover a broad spectrum of digital services transmitted via the internet, such as downloading e-books, online advertising, data transmission over computer networks, provision of digital content, music streaming, and cloud storage access. The definition of OIDAR services, according to Section 2(17) of the IGST Act, 2017, includes services delivered via information technology over the internet or electronic networks. The range of services falling under OIDAR includes:

• Provision of website services, web hosting, and remote maintenance of programs and equipment.
• Software-as-a-Service provision. Provision of images, text, information, and access to databases.
• Supply of music, films, games (including gambling), and various broadcasts and events related to politics, culture, art, sports, science, and entertainment.
• Distance learning services, including online automated teaching, virtual classrooms, and automated assessment of online workbooks.

The taxability of OIDAR services is based on the location of the recipient and GST liability is determined accordingly.

Before the implementation of GST on OIDAR services, Business-to-business (B2B) OIDAR services received from abroad were taxable under reverse charge, with the recipient in India bearing the service tax liability.