Cross-Border Consumption Of Digital Content May Get Costlier, Say Experts

Digital content for users in India is set to get costlier as the Finance Bill, 2023 seeks to amend the provision that deals with taxation of online and digitally supplied services by overseas entities.

Referred to as 'Online Information and Database Access and Retrieval Services', or OIDAR, it includes activities like advertising on the internet; cloud services; supply of e-books, music, movies, software, etc; digital data storage; and online gaming.

Such services attract Goods and Services Tax, which needs to be paid by the supplier situated overseas if the consumer in India is an unregistered entity.

In order to qualify as an OIDAR service, it must be automated and require 'minimal human intervention'. But the law doesn't define 'minimal human intervention' or what degree of human intervention will take a service out of the scope of this levy.

Only a few judicial rulings have shed light on its interpretation.

Take the case of U.S.-based Pearson VUE, which provides computer-based test administration solutions to customers in India. The Authority of Advance Rulings in Karnataka held that a Pearson test, where a human merely validated the automatic test score, qualifies as an OIDAR service. But where the test was in the form of an essay, where the evaluation was completely undertaken by a human, it was outside the scope of OIDAR services.

In the case of NMMC, the Advance Ruling Authority held that online tenders would amount to OIDAR services. An e-tender, being an intangible, is delivered through the internet and would amount to an OIDAR service, the AAR had held.

The Finance Bill, 2023 has now proposed that the phrase 'essentially automated and involving minimal human intervention' be removed from the definition of OIDAR.

According to experts, this will increase the tax burden of foreign entities providing digital services in India, as the responsibility to pay GST on such services rests with the OIDAR entity when the consumer is an entity unregistered under the Act. Inevitably, this burden will be passed on to consumers.

This change would most likely impact entities engaged in online educational services, according to Rajat Bose, partner at Shardul Amarchand Mangaldas and Co.

Earlier, foreign entities engaged in services involving some human intervention were not obligated to pay taxes in India, as they did not fit in the definition of OIDAR services. By expanding the definition, such entities would be forced to get registered in India and pay taxes for their services rendered in India, he said.

The proposal will most likely increase the cost of availing such services, according to Asish Philip, partner at Lakshmikumaran and Sridharan Attorneys.

Further increasing the scope of OIDAR services, the Finance Bill, 2023 has proposed to remove any distinction between services rendered for commercial purposes versus for consumption purposes.

Currently, the OIDAR service provider doesn't have to pay IGST if the unregistered entity in India is using the service for business purposes. The proposal is to now get the OIDAR service provider to pay tax, regardless of the purpose of use by individuals/unregistered entity in India.

According to Meyyappan Nagappan, partner at Trilegal, this distinction between commercial purpose and personal use can be perhaps explained through the rationale in the 2017 OECD VAT guidelines, that said businesses should incur similar levels of taxation and that a supply for business purposes cannot be equated with a supply for personal use.

With respect to business-to-business transactions, it was the duty of entities registered in India to pay tax on such transactions, he highlighted.

When the law mandated that registered entities that were recipients of these services were liable to pay taxes under the reverse charge mechanism in India, unregistered entities (with turnover below Rs 20 lakh) were left out, as most of these transactions were of low value.

While including all businesses within the tax net may seem like a fair policy choice, the government’s administrative and enforcement costs for collecting tax from small businesses are usually higher when compared with the revenue generated, he said.

It is therefore, according to him, not unusual globally for most countries with VATs to exempt some small businesses.

The law, while exempting business use for small unregistered businesses, chose to tax services rendered to individuals for personal use as most of the OIDAR entities—when the provisions were introduced—typically catered to individuals for consumption purposes, he said.

According to him, it is not clear as to what tax leakage the proposed amendment is intended to resolve, as the current provision is based on sound tax policy principles. The proposed amendment raises serious questions regarding the administrability of these provisions.

A distinction between commercial and personal transactions could have created difficulties for companies in tracking these transactions and paying appropriate taxes. A person could be using services of a cloud service provider, for instance, for personal or commercial purposes.

However, this creates more problems than it resolves, according to experts. For instance, businesses like foreign consultancies providing services in India might now shy away from engaging with Indian customers as any and every transaction would now be taxed, regardless of their nature.