Home / Budget / Budget Expectations /  Budget  to bring tax clarity for offshore digital businesses

New Delhi: The government plans to amend the GST law to clarify the Integrated Goods and Services Tax (IGST) liability for offshore digital businesses offering services such as online advertising, games, and cloud services to Indian users.

The idea is to amend the IGST Act through the finance bill to redefine what constitutes Online Information Database Access and Retrieval (OIDAR) that is liable to 18% IGST when availed by a customer in India from offshore suppliers, two people aware of the discussions in the government said, requesting anonymity. Separately, the government also proposes to redefine who is a ‘non-taxable’ online recipient of such services to fix the onus of tax payment on the offshore seller in some instances.

The Union budget to be presented on 1 February by finance minister Nirmala Sitharaman seeks to clarify the taxation of import of IT services at a time India is emerging as a big user of technology. The indirect tax administration also wants to align the tax framework with the country’s changing nature of economic activities.

OIDAR services are defined in law as services delivered through IT over the internet, which are essentially automated and involve minimal human intervention. These services include advertising on the internet, cloud services, sale of e-books, movies, music and software, supply of digital content, data storage and online gaming.

Of the two amendments planned, one is to amend section 2(17) of the IGST Act to redefine OIDAR services by dropping the reference to “involving minimal human intervention" in service delivery. This is expected to eliminate ambiguity on the businesses covered under this tax liability and reduce litigation, said one of the two people cited above.

Usually, the onus to collect GST on a transaction from the buyer and to remit it to the government falls on the seller, but in certain cases, the onus of payment is placed on the buyer for administrative ease. OIDAR is an example of this system called ‘reverse charge.’ The current regulatory position is that where such services are provided to a person in India, the registered entity has to pay GST under reverse charge. But if users avail of services in their individual capacity and are not GST registered, then the offshore company has to register directly or through an agent and pay GST on these transactions, said Abhishek Jain, partner, indirect tax at KPMG in India.

“The words “involving minimal human intervention" may be prone to interpretation and allows the leeway to some entities to claim that their services may entail more than minimal human intervention and therefore are out of the scope of IGST. If the condition about human intervention is deleted, then irrespective of whether there is any human intervention, these services mediated through IT and delivered over the internet will be taxable services once the amendment comes through. The idea seems to be to remove a grey area prone to interpretational issues and to reduce litigation," Jain said.

Emails sent to the spokesperson for the finance ministry and the GST Council Secretariat on Friday seeking comments for the story remained unanswered at the time of publishing.

A second amendment expected in the Finance Bill 2023 is a change in the definition of ‘non-taxable online recipient’ in section 16 of the IGST Act. Currently, in cases where the user is an unregistered individual who avails an OIDAR service, for example, a software license, for personal use, then the onus of payment of IGST is not on him but on the offshore service provider. But it is a challenge for the government to figure out whether such software license is used for personal or business purposes. In the latter case, it is the individual user’s liability to pay IGST. As a solution, the government is reworking the definition of a non-taxable online recipient, said the second person. It is likely that the onus of paying IGST will be placed on the seller in cases of unregistered persons, irrespective of whether it is for personal or business use, for administrative ease.

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