Tax, Accounting, and Finance Chronicle

The advent of the Goods and Services Tax (GST) in India marks a pivotal transformation in the nation’s indirect tax structure, fostering a cohesive and streamlined market. Among the various sectors reshaped by GST, the realm of Online Information and Database Access or Retrieval (OIDAR) Services stands out due to its inherently digital nature and far-reaching impact.

OIDAR services encompass a broad spectrum of digital offerings, including online libraries, comprehensive databases, information retrieval systems, and access to diverse online content. These services, characterized by their automation and internet-based delivery, are indispensable for businesses and individuals in pursuit of timely and accurate information. The quintessential feature of OIDAR services lies in their digital format, enabling effortless cross-border dissemination without necessitating a physical presence within the consumer’s jurisdiction.

Since its inception under the erstwhile Service Tax regime, the concept of OIDAR services has sparked considerable debate. Initially, the scope of these services was relatively narrow, but the rapid evolution of the internet has significantly broadened their reach. This expansion underscored the necessity for a unified regulatory framework to govern and tax these services effectively, culminating in their incorporation under the GST regime.

To address this need, the Integrated Goods and Services Tax Act of 2017 (IGST Act, 2017) instituted specific provisions for the administration and collection of GST on OIDAR services. A comprehensive examination of these provisions is delineated below.

DEFINITION & SCOPE

Section 2(17) of the IGST Act, 2017 defines OIDAR services as:

“online information and database access or retrieval services” means services whose 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 and includes electronic services such as, –

From the definition provided, it’s clear that OIDAR services encompass two main components: the meaning part and an illustrative list of transactions. These transactions include internet advertising, cloud services, online streaming services, and digital data storage services, among others. This clarity aids in understanding which services fall under OIDAR. However, for services not explicitly listed, taxpayers must rely on interpreting the meaning part of the OIDAR definition.

Before the amendment by the Finance Act, 2023, a critical requirement for qualifying as OIDAR services was that the service had to be “essentially automated and involving minimal human intervention.” The term “minimal human intervention” was not defined under GST Law, leaving ambiguity regarding the exact degree of human involvement needed to exclude a service from OIDAR classification.

This lack of clear guidance led to widespread uncertainty within the industry. To address this, the definition of OIDAR services was amended to eliminate such ambiguity. Following the amendment, the scope of taxable OIDAR services has significantly expanded. Now, it includes any services reliant on information technology and delivered over the internet or an electronic network, regardless of the level of human intervention involved.

Taxability of OIDAR Services

In the realm of Online Information Database Access and Retrieval (OIDAR) services, taxability hinges on the principle of destination-based tax, which mandates that tax revenue is allocated to the jurisdiction where the service is consumed. This ensures equitable distribution of tax revenues, benefiting the regions where the end-users are located, rather than where the service providers operate.

Both domestic and foreign providers delivering OIDAR services to Indian consumers fall under the ambit of GST. With an exception for e-books classified under Heading 9984, these services attract a standard GST rate of 18%. This rate aligns with the broader tax structure for goods and services in India, maintaining consistency and clarity for stakeholders.

The Integrated Goods and Services Tax (IGST) Act, 2017, under Section 14, stipulates the liability of non-taxable territory suppliers to remit tax when supplying OIDAR services to Non-Taxable Online Recipients (NTORs). Essentially, if a supplier from a non-taxable region provides OIDAR services to an NTOR, the onus to deposit IGST falls squarely on the supplier.

The term “NTOR” is specifically defined in Section 2(16) of the IGST Act, 2017. It encompasses unregistered individuals receiving OIDAR services in taxable territories, including entities registered solely for Tax Deduction at Source purposes (e.g., government departments, local authorities, and various government agencies). This definition clarifies that if the Indian recipient of OIDAR services is unregistered under GST or registered only for TDS purposes, the foreign service provider must remit IGST for the provided services.

Additionally, according to Notification No. 10/2017-Integrated Tax (Rate) dated 28-06-2017 (as amended), if any service is supplied by an entity in a non-taxable territory to any person (excluding NTORs) in a taxable territory, the GST liability under the Reverse Charge Mechanism (RCM) is triggered. This stipulates that the recipient of such services is responsible for depositing the applicable GST, ensuring compliance and proper tax collection within India’s jurisdiction.

When OIDAR services are provided by a foreign service provider to a registered recipient in India, the recipient is obligated to pay GST under the Reverse Charge Mechanism (RCM). This scenario is crucial in understanding the taxability framework for OIDAR services. Below is a concise summary:

The table above highlights the diverse tax implications based on the geographical locations of both the service provider and the recipient. Understanding these nuances ensures compliance and optimizes financial operations within the OIDAR service landscape.

Place of supply

In the realm of OIDAR services, the determination of the place of supply for transactions between foreign service providers and recipients located in India is meticulously outlined by Section 13(12) of the IGST Act, 2017. According to this statutory provision, the location of the service recipient is pivotal in identifying the place of supply.

To elucidate, the Explanation to Section 13(12) delineates certain exceptions that, when met, mandate the place of supply as within the taxable territory. Crucially, if any two of these criteria are satisfied, the supply is deemed taxable within this jurisdiction. Noteworthy exceptions include scenarios where the recipient’s device IP address is situated within the taxable territory, or the billing address of the recipient falls within this domain. This precise legal framework ensures the accurate taxability of cross-border digital services, fortifying the integrity of the taxable territory.

Registration, Payment of Tax & Returns

Under the GST Law, it is imperative for all suppliers of Online Information Database Access and Retrieval (OIDAR) services, including foreign entities, to register for GST if they provide services to recipients in India. Domestic service providers are required to register once their Aggregate Turnover surpasses the designated threshold limit.

Notably, foreign service providers must secure GST registration regardless of turnover if supplying OIDAR services to unregistered recipients in India. This registration can be facilitated through the Simplified Registration Scheme by submitting FORM GST REG-10. If a foreign service provider supplies services to Non-Taxable Online Recipients (NTOR) through an intermediary, the intermediary must register for GST and remit the applicable Integrated Goods and Services Tax (IGST).

Additionally, if there is a representative in India acting on behalf of the foreign service provider, this representative must obtain GST registration and remit the necessary IGST. In the absence of a physical presence or representative in India, the foreign service provider is obligated to appoint an Indian representative for the purpose of IGST payment.

Foreign service providers registered as OIDAR Service Providers are not entitled to claim Input Tax Credit of GST. They must file a monthly return using Form GSTR-5A by the 20th of the following month, ensuring all GST liabilities for the return period are settled. Even if there is no business activity during a tax period, Form GSTR-5A must be filed as a Nil Return.

Conversely, Indian service providers with GST registration are required to file regular returns using Form GSTR-1 and Form GSTR-3B, adhering to the prescribed schedules and compliance mandates.

Significant Judgments on OIDAR Services within the GST Framework

Amogh Ramesh Bhatawadekar

In a pivotal ruling, the applicant, Amogh Ramesh Bhatawadekar, engaged in the provision of e-goods through “Online Gaming.” The process began with the applicant soliciting lists of digital products—predominantly online games—from various suppliers. These digital products were transmitted to the applicant via email or instant messaging services, followed by a payout. Subsequently, the received digital goods were evaluated and stored on cloud servers, ready for delivery to customers who visited the applicant’s website and made payments. Upon payment, the online games were delivered to the customer via email from the cloud server.

Initially, the applicant did not obtain a GSTIN, assuming these transactions to constitute the export of digital goods. However, the Authority for Advance Ruling clarified that the provision of online games or digital goods qualifies as a supply of service, not goods, and falls under the classification of Online Information Database Access and Retrieval (OIDAR) services. Consequently, the applicant is mandated to remit GST on the transactions involving the purchase and sale of these digital goods.

NCS Pearson Inc

In another crucial judgment, the GST Appellate Advance Ruling Authority addressed the nature of services provided by NCS Pearson Inc. The case pertained to the company’s administration of online tests, specifically Type-3 tests. The authority observed that these tests employed a system where the reliability was gauged based on the agreement among human raters. Although human scorers were involved to ensure the AES program’s reliability, the primary objective was to evaluate candidate performance using an automated system.

The Appellate Authority concluded that the human element’s role in assessing essay responses constituted “minimum human intervention.” This minimal human involvement satisfied the criteria for the service to be classified as OIDAR. Thus, the Type-3 test conducted by NCS Pearson Inc. was deemed to fall under the purview of OIDAR services, necessitating compliance with GST regulations.

These rulings underscore the nuanced interpretation of digital transactions within the GST regime, particularly the classification of services as OIDAR, and highlight the imperative for businesses to meticulously adhere to tax obligations.

Conclusion

The taxation landscape of OIDAR services introduces a multifaceted array of challenges that necessitate continuous vigilance and flexibility from the Government. The revised definition of OIDAR services encompasses a broad spectrum of applicability and interpretation, inevitably leading to potential disputes between taxpayers and Revenue Authorities. It is imperative that the Government provides further clarity on this matter to mitigate such disputes effectively.

Additionally, the legislative intent behind the specific GST Law provisions aims to track foreign entities supplying OIDAR services to NTOR. However, enforcing GST compliance among these foreign entities presents distinct challenges. Addressing these issues requires a blend of technological innovations and robust regulatory frameworks. Through diligent oversight and proactive regulation, the Government can fully leverage the revenue and economic growth potential inherent in OIDAR services.

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