The Central Board of Indirect Taxes and Customs has recently issued a notification that signifies a significant shift in policy. Specifically, it has been stipulated that Online Information and Database Access or Retrieval (OIDAR) service providers, who have previously enjoyed exemption from the Integrated Goods and Services Tax (IGST), will no longer have this privilege.
This development carries substantial implications, particularly for prominent entities like Facebook, X (formerly known as Twitter), Google, as well as various tech enterprises. As per a report by The Economic Times, these corporate giants could potentially find themselves subject to an IGST rate of up to 18 percent for the services they provide to both government agencies and individual consumers within India.
The crux of the matter is that OIDAR service providers, such as the aforementioned tech behemoths, are set to confront this additional IGST levy after it has been proposed to eliminate their exemptions, with the changes slated to take effect from October 1.
The notification issued by the Central Board of Indirect Taxes and Customs serves as the official declaration of this policy modification. Its implications extend across a broad spectrum of overseas companies delivering various services, including but not limited to advertising, cloud-based services, music streaming, subscription-based offerings, online educational services, and the dissemination of information. Importantly, this imposition of IGST will apply irrespective of whether these services are utilized for personal or business purposes, a fact elucidated by a source quoted in the ET report.
Previously, the landscape for OIDAR services involved certain nuances. Services offered by overseas OIDAR providers, situated in territories not subject to taxation, were exempt from taxation when utilized by government bodies, government authorities, or individuals for non-business purposes. Taxation was, in essence, limited to transactions categorized as business-to-business (B2B) services.
OIDAR services are characterized by their delivery via IT over the internet, marked by automation and minimal human intervention. This broad category encompasses a diverse range of offerings, spanning from online advertising, cloud-based services, and e-books to media streaming, digital content sales, data storage, and online gaming.
Notably, in the 2023 Finance Act, the ambit of taxation for OIDAR services underwent expansion. The definition was revised to exclude the requirement for services to involve "minimal human intervention" in their delivery. Furthermore, a shift was observed in the definition of a 'non-taxable online recipient,' which now includes non-registered recipients under section 16 of the IGST Act. This essentially places the responsibility for tax collection on the shoulders of the service providers themselves.
This notification has been issued with the intent of eliminating any ambiguity stemming from the changes introduced in the 2023 Finance Act. As a result, exemptions for individuals and government entities have been rescinded, and OIDAR service providers are also mandated to maintain a user database.
While larger corporations may have already undertaken measures to cope with the compliance requirements associated with these changes, experts have expressed concerns that smaller enterprises, particularly those in the tech and subscription-based service sectors, may face heightened compliance obligations. This shift in policy is anticipated to broaden the scope of services that fall under the tax purview, even those involving some degree of human intervention, due to the elimination of the term 'involving minimal human intervention,' as highlighted by Pratik Jain, a Partner at PWC, in his remarks to the publication.
