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India introduces new digital service tax rules - two weeks to go!

International suppliers of digital services to India-based consumers must now comply with new place of consumption tax rules.

Nov 14, 2016

International suppliers of digital services have just two weeks to prepare for new place of consumption tax rules just introduced in India.

India GST plan

On November 9 India’s Central Board of Excise and Customs (CBEC) released an official circular identifying and explaining the rule change. The new rules come into effect on Thursday, December 1, and specifically target the cross-border supply of Business-to-Consumer (B2C) digital services to India-based consumers. The technical tax development here is the withdrawal of the exemption on these B2C cross-border sales. There is no change to the status of B2B cross-border sales.

For international digital service suppliers the narrow window for compliance with the new Indian rules will come as a shock, especially leading up to the Christmas period when resources are typically stretched.

The new rules closely resemble the advice in the VAT/GST guidelines recently endorsed by the Organisation for Economic Development and Cooperation (OECD). These guidelines are also included in Action 1 of the October 2015 Base Erosion and Profit Shifting (BEPS) report. Action 1 of BEPS focused on addressing the tax challenges of the digital economy.

The new rule changes the application of India’s service tax for digital services from the place of the supplier to the place of the consumer. This means that, from December 1, international suppliers of digital services (e.g. movie, app, or photo downloads) to Indian-based consumers must collect and remit the tax to the Indian Government.

There is a threshold included of Rs. 10 lakh – circa. USD$14,750, EUR€13,700, GBP£11,750 (calculations from xe.com on Monday, November 14, 11am) – that must be breached before the supplier has to register and start collecting the tax due for remittance. The tax to be levied is a 15% service tax.

Reasons for new rules

As has been the case with all similar implementation of new place of consumption rules globally, the Indian Government is changing their legislation in an effort to boost their tax take.

According to India’s Economic Times the number of online shoppers in India is expected to grow from 50 million in 2015 to 320 million in 2020. By then Morgan Stanley estimates that India’s ecommerce market will be worth $119 billion.

India adds three internet users a second with Government initiatives such as the National Optical Fibre Network (NOFN) schemes significantly increasing internet penetration in the rural communities. This improvement in infrastructure allied to a growing middle class has led to a boom in Indian eCommerce. The NOFN, for example, has led to an upsurge in online orders from tier 4 Indian towns (population between 10,000 and 20,000) thus opening up a huge untapped marketplace for eCommerce companies.

The government is keenly aware of this growth and wants its slice, especially of the international B2C sales to India-based consumers that are currently exempted from service tax.

It follows the global pattern of an increasing number of tax authorities taking their lead from the OECD’s BEPS report and implementing taxation changes to tackle the growing digital economy. Last month New Zealand introduced such rules with Russia (January 2017) and Australia (July 2017) following suit. Other jurisdictions such as Taiwan (date unconfirmed) and Belarus (January 2018) have also revealed plans.

What digital services are affected?

The CBEC regulatory circular identifies the type of digital services that will be affected come December 1. It lists the affected services as “cross-border OIDAR supplies”. OIDAR standing for online information and database access or retrieval.

India’s service tax legislation changes the wording of how such OIDAR services are defined with the following added: “delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology”.

The circular also provides a list of such services, and includes the following:

  • Website supply, web-hosting, distance maintenance of programmes and equipment
  • Supply of software and updating thereof
  • Supply of images, text and information and making available of databases
  • Supply of music, films and games, including games of chance and gambling games, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events
  • Supply of distance teaching

All of the above list have sub-lists that go into more detail but it gives an overview of the type of cross-border B2C digital (OIDAR) service that are the targets of the new rules. The affected businesses include online marketplaces. Keen followers of the implementation of such rules will notice a similarity between the types of services listed above and those covered in the European Union cross-border place of supply VAT rules introduced in January 2015.

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