The next time you download music or an e-book from an overseas site or decide to buy some storage on a cloud from an overseas service provider, beware.
Beginning December 1, a service tax component of 15% will be added to your bill.
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Domestic suppliers, say of movies which can be downloaded by customers in India, already incur this service tax. But if the supplier is overseas, the tax doesn¡¯t apply if the recipient is an individual, government, local body or government agency based in India.
Overseas suppliers incur the service tax only in respect of B2B transactions where the recipient is in India. Further, an exemption is available in such B2B transactions if the supply is related to information databases (such as a subscription for international tax journals).
In a surprising move, the Central Board of Excise and Customs (CBEC) has¡ªthrough four separate but interlinked notifications dated November 9¡ªsignificantly amended the ¡®Place of Provisions of Services Rules¡¯ (PPSR) for ¡®online information and database access or retrieval services¡¯, thus impacting your bill.
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The crux of the amendment is the change in the definition of ¡®place of provision of service¡¯. At present, if service providers are outside India, the place of provision of service is also outside India and no service tax are payable on such services supplied to individuals, government and government bodies in India (service tax applied only to B2B transactions as explained earlier).
From December 1, the place of provision of a service will be the location of the service recipient. ¡°Hence, say, all downloads in India will be subject to service tax. The amendments impact overseas companies providing various services like advertisements, web subscriptions, cloud hosting, music, e-books and gaming, to name a few. These services provided to governments and individuals were earlier not subject to service tax.
They now become taxable and the overseas service provider or any intermediary or authorised representative will need to register in India and pay the service tax,¡± says Sunil Gabhawalla, chartered accountant and indirect tax expert. He added, ¡°Since the overseas service provider is likely to collect this tax from the end user who downloads these services, it will increase the cost for the consumer.¡±
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From an industry perspective, there will be a level-playing field between domestic and overseas suppliers once the new rule comes into effect.
The definition of ¡®online information and database access or retrieval services¡¯ has also been changed. It now 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¡±.
According to the CBEC notification, this includes services such as internet advertising, providing cloud services, e-books, movies, music, software and other intangibles via telecommunication networks or internet; providing data or information in electronic format via a computer network, online supply of digital content, digital data storage and online gaming. ¡°The definition is very extensive. Its scope has widely increased by including cloud services, online gaming and data storage,¡± Gabhawalla said.
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Industry watchers say there will be practical difficulties in payment of such taxes if the overseas supplier has no presence in India. These notifications relate to service tax and are different from the equalisation levy of 6% introduced from June 1 for B2B online advertisements of Rs 1 lakh or more in a year, paid to overseas entities.