New GST law, new India, new burdens

Wed Jun 28, 2017

When the Lok Sabha (India’s lower house of parliament) finally passed the Goods and Services Tax (GST) Bill in late March this year the country’s Prime Minister Narendra Modi congratulated all with the declaration: ‘New year, new law, new India’.

For international sellers of digital services, however, the new law brings new burdens. One of the major revelations in India’s GST bill is that there is no sales threshold to registration for foreign digital service providers. This means that just one sale to an India-based customer will trigger registration requirements followed by a host of GST collection, return filing, and remittance tasks. There is, however, a threshold for domestic suppliers. For more information check out our blog on this very topic here.

The new India GST law builds upon the changes made to India’s service tax system back in December 2016. The law reinforces the place of supply taxation principle as recommended by the Organisation for Economic Cooperation and Development (OECD) as a means of taxing digital economy activity.

India is the latest in a lengthening list of tax jurisdictions to amend their indirect tax systems so that foreign-based companies supplying digital services to domestic customers are taxed in the same way that local companies are. This trend is on the upward curve as Australia and Bangladesh also plan to change their indirect taxation systems on the same day as India.

The good news for affected international businesses is that Taxamo can remove these burdens from day-to-day operations. Part of our market-leading service is that we assume the GST liability in India, as we do for many other jurisdictions that have already introduced such rules. This means that businesses can concentrate on their core functions, free from the distraction and worry of compliance with India’s new GST law.

The long and winding road to GST

The long and winding road to GST

After years of deliberations – a tax system overhaul was first mooted back in 1986 – the new India will finally unveil its new nationwide GST system on July 1. It has been one of the most complex taxation reforms ever undertaken coming to fruition 70 years after the country’s independence. The new taxation system replaces a labyrinth of taxes (indirect taxes, duties, surcharges, and cesses) that combined complicated doing business in India. Now there will be one nationwide system. The end goal of such tax reform is to create a single Indian market and to make it easier to do business on the sub-continent.

“No country of comparable size and complexity has attempted a tax reform of this scale,” Harishankar Subramanian, of Ernst and Young, told the BBC last August.

India is continuing to develop rapidly and this law change is another example of the growth. Within the next decade India is set to overtake France, Japan, and Germany to become the world’s third-largest economy, according to recent United States Department of Agriculture (USDA) Economic Research Service estimates.

The potential for additional growth in India is phenomenal. According to the World Bank just over a quarter (26%) of India’s 1.3 billion population accessed the internet in 2015. That’s still 340 million internet users but by 2021 this figure is expected to nearly double to 636 million users. It is a market ripe for picking and our aim is to help businesses concentrate on what they do best and let us take care of the GST red tape.

Service tax has been subsumed into GST system

Let’s get back to the core details of the new GST law. There are various GST rates, but we are primarily concerned with digital services for which the key rate will be 18%.

An array of existing taxes – such as the aforementioned service tax – will be subsumed into the new GST system. The service tax system was altered (with less than a month’s notice) back in December 2016 to take into account digital services supplied by foreign businesses to India-based customers. This service tax legislative amendment included a threshold of INR 10 lakh. As stated, the new GST legislation also includes a threshold but only for domestic digital service providers. All non-resident suppliers must register for India GST if they have one sale to an India-based customer.

The definition of such services is that their delivery is via the internet, is automated and involves minimal human intervention. This definition includes electronic services such as:

  1. Online advertising
  2. Cloud service providers
  3. The provision of e-books, movie, music, software and other intangibles via telecommunication networks or internet
  4. Providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network
  5. Online supplies of digital content (movies, television shows, music, etc.);
  6. Digital data storage
  7. Online gaming

The target of this new law is established in section 24, sub-section (xii), of the Indian GST Act where it states that “every person supplying online information and database access or retrieval services from a place outside India to a person in India, other than a registered person” shall be required to register for GST. A few sub-sections before this declaration, sub-section (v) provides the relevant information relating to the registration of “non-resident taxable persons, irrespective of the threshold”. This threshold, as stated previously in this piece, only applies to domestic suppliers.

We are here to help

In assuming the India GST liability for our merchants we allow them to concentrate on their core business. Contact us now to learn more about how Taxamo takes on the indirect tax liability of digital companies selling services to India-based customer.

Note: Taxamo content is created for guidance only, please consult your local tax advisor.

Contact us to find out more about our solution