[Opinion] OIDAR Services under GST | Mayhem in Order!
- Blog|Budget|Finance Act|
- 6 Min Read
- By Taxmann
- Last Updated on 21 March, 2023
Authored by Jigar Doshi – Founding Partner & Nikita Maheshwari – Senior Manager | TMSL
Table of Contents
The Economic Survey 2022-23 highlighted that the GST collections for the period April 2022 to November 2022 soared up to a whooping 11.9 lakh crore in total – a double digit absolute numbers (that too just for a period of 8 months!) for the first time ever since GST was introduced. A clear sign of tax buoyancy and economic growth. One could wonder whether this uprise of tax revenue is on account of increased taxpayer base; i.e., 70 crores to 140 crores or on account of policy changes. Well, one thing is for certain, the augmented tax revenue cannot be wholly on account of taxpayer’s base and hence some portion of it should be due to policy change.
One such policy change which could enhance the tax revenue further is the proposed change by the Union Budget in the definition of Online Information Data and Access Retrieval service (OIDAR) and Non-taxable online recipient (NTOR). Considering that OIDAR is yet not a very common term and service in India, lets first understand the nuances.
1. Definition of OIDAR and NTOR
“Non-taxable online recipient” means any Government, local authority, governmental authority, an individual or any other person not registered and receiving online information and database access or retrieval services in relation to any purpose other than commerce, industry or any other business or profession, located in taxable territory.
Explanation: For the purposes of this clause, the expression “governmental authority” means an authority or a board or any other body,––
(i) set up by an Act of Parliament or a State Legislature; or
(ii) established by any Government,
with ninety per cent or more participation by way of equity or control, to carry out any function entrusted [ to a Panchayat under article 243G or] to a municipality under article 243W of the Constitution;
NTOR means any unregistered person receiving online information and database access or retrieval services located in the taxable territory.
Explanation: For the purposes of this clause, the expression “unregistered person” includes a person registered solely in terms of clause (vi) of section 24 of the Central Goods and Services Tax Act, 2017′;
“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, ––
(i) advertising on the internet;
(ii) providing cloud services;
(iii) provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet;
(iv) providing data or information, retrievable or otherwise, to any person in electronic form through a computer network;
(v) online supplies of digital content (movies, television shows, music and the like);
(vi) digital data storage; and
(vii) online gaming;
(The strikethrough part of the definition symbolises the amendment proposed by the Union Budget 2023)
Therefore, from the above definition, one can understand that any service which is delivered over internet or electronic network is an OIDAR service. OIDAR service when received by a NTOR which is located in India is liable to be taxed in the hands of the service provider1. Further, Section 13(12) of the IGST Act, 2017 prescribes that in case of OIDAR services received by a registered person, the service shall be taxable in the hands of the service recipient, subject to the conditions prescribed.
2. What was the issue and why the amendment?
The said service was the culprit of interpretational issues. When the NTOR received services from a service provider outside India, it was often contended that the said service was for business and commerce; hence, falling outside the purview of taxability. Further, the category of NTOR has been now restricted to include persons who are solely registered for the purpose of tax deduction at source (TDS) such as department or establishment of Central Government, State government, local authority, government agencies and other non-registered taxpayers.
Furthermore, at this juncture it needs to be mentioned that in case of the recipient being a registered taxpayer in India and the OIDAR service provider being outside India, the service becomes taxable in the hands of the recipient under reverse charge mechanism.
Moreover, the scope of OIDAR services is now made unambiguous by removal of wide terms such as ‘automated and minimal human intervention’. Due to such vague terms being used, the issue became litigious. To make the taxability clear and iron out on any unambiguity, the Union Budget 2023, proposes to bring in the above amendments.
However, one should also be wary that even if the OIDAR services are provided within India (i.e., the supplier and the recipient both are in India) then too, the taxability net has widened significantly to include any or all services rendered through internet with or without manual intervention. Therefore, by merely amending the definition of OIDAR, the Government seeks to reach out to all service providers rendering services online.
3. How does the past sway?
OIDAR was brought into the net of indirect taxation in 2001 during the Service tax regime. It included specified services such as software supply, downloading music etc. However, as the internet evolved, the scope of service was broadened in 2016. In the education guide issued by CBIC in 2012, OIDAR was defined as below:
“Online information and database access or retrieval services” are services in relation to online information and database access or retrieval or both, in electronic form through computer network, in any manner. Thus, these services are essentially delivered over the internet or an electronic network which relies on the internet or similar network for their provision. The other important feature of these services is that they are completely automated, and require minimal human intervention.
Examples of such services are: –
(i) online information generated automatically by software from specific data input by the customer, such as web-based services providing trade statistics, legal and financial data, matrimonial services, social networking sites;
(ii) digitized content of books and other electronic publications, subscription of online newspapers and journals, online news, flight information and weather reports;
(iii) Web-based services providing access or download of digital content.
Therefore, as can be seen, the condition of minimal manual intervention was being carried forward from the legacy law. So why did the Government remove it now? The condition of ‘minimal manual intervention’ was being used by multiple service providers as a shield and the same was paving an escape route for some service providers. The amendment may seem like a non-significant one for now, but it shall have a vast impact. Just imagine when you remove the condition of ‘minimal human intervention’, will the coverage of this service extend to webinars, online/ recorded lectures, other services which are very common provided online such as professional consultancy (architects, astrologers, wellness mentors, etc.)
While the amendment will create a turmoil in multiple industries, the question that persist is whether the Government would be able to track the receipt and consumption of services in India, especially by a NTOR who is an individual, considering that the nature of transactions and quantum? If one assumes that the answer to the above question is affirmative, how would the Government levy tax on the service provider and ensure its compliance especially in cases where the service providers are located outside India? Will this not lead to a situation similar to the ITC mismatch and its implications on recipients in case supplier is absconding wherein the recipient is made responsible for non-payment of tax is finally asked to pay such tax?
This amendment shall force service providers rendering services through internet to re-evaluate their tax positions and the NTOR’s to seek indemnity in their contracts to ensure that the ultimate tax liability does not percolates down on them.
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