Services availed by a person in India from a person outside India is liable to tax in India under the Tax Laws in India. This is affected under the Direct Tax Laws by way of withholding tax or tax deduction at source and under the Indirect Tax Laws by the Reverse Charge Mechanism wherein the recipient of services is required to pay tax into the government treasury.
Online services / downloads for levy of taxes in India
- Indirect Taxes – “Online Information Data Access and Retrieval” (OIDAR) services under GST Law
- Direct Taxes – ie tax on the income is either
- Equalisation Levy as introduced under Chapter VIII to the Finance Act 2016 OR
- Withholding taxes under section 195 of the Income Tax Act
Indirect Taxes – GST
GST is applicable on supply of all goods and services in India. To determine the Place of Supply an elaborate code is provided under Sec 10 and 11 (for goods) and Sec 12 and 13 (for services) of the IGST Act.
GST being a destination-based consumption tax the general rule for taxation in respect of the place of supply for goods is the destination where goods are delivered and for services it is the address of the recipient of service.
The tax is to be collected and paid by the service provider.
However, where the service provider is not in India the onus for payment of tax is cast on the service recipient under reverse charge mechanism. [Sec 5(3) of the IGST Act read with Noti 10/2017 – IGST Rate]
Online services referred to as OIDAR services under the GST law has an inclusive definition services such as (i) Advertising on the internet; (ii) Cloud services; (iii) online access or download of e-books, music, movie, gamming, software’s and other such intangibles; (iv) digital data storage or information and retrieval. [Sec 2(17) of IGST Act]
Considering the nature of services, the location of the recipient of the services would be deemed to be in India where the (i) connectivity for availment of services or (ii) the billing address or (iii) download of the service is in India. [Sec 13(12) of IGST Act]
The service recipient in India shall pay GST @ 18% on the expenses incurred for the OIDAR services under reverse charge mechanism if he is registered under the GST Laws.
However, where the service recipient is not registered under the GST laws; in effect where the OIDAR services is taken by a person for a non-business purpose then the onus to pay GST has been cast upon the service provider or his intermediary outside India. The GST shall be payable by the representative (in India) of the service provider. [Sec 14 of the IGST Act].
Direct Taxes – Income Tax Act and Equalisation Levy
Income accrued or received in India through any source or business in India is taxable in India and in this aspect even the non-resident is liable for the payment of the taxes subject to any relief under any Tax Treaty. [Sec 9 of the Income Tax Act].
The person who has availed of the services in India is required to withhold taxes on any sum paid to the non- resident which is chargeable to tax under the Income Tax Act. The procedure for the reporting of such transactions, by the recipient, vide Form 15CA/CB has been encoded under the Income Tax Law. [Sec 195 of the Income Tax Act read with Rule 37BB of the Income Tax Rules].
Online services due to its nature, at times, would entail online payments through cards or banking channels prior to the download or prior to the services being availed. This would result in the transaction escaping the compliance of Form 15CA/CB as no remittances are being made through the authorised dealers in India.
The compliances of withholding however remains applicable and the same can be done post facto after considering the grossing up mechanism as prescribed under Sec 195A of the Income Tax Act.
The Finance Act 2016 introduced a new tax under Chapter VIII – an Equalisation Levy @6% to be paid for services of digital advertising and other related services for online advertising to a non-resident service provider who does not have a permanent establishment in India. if
(i)services are availed by a person in India (resident or a non-resident with a permanent establishment in India) having Income from Business or Profession, and
(ii) where the aggregate amount paid to the non-resident exceeds INR 1 lac
[Sec 161 and 162 of the Finance Act 2016]
The Equalisation Levy is to be to be deducted from the amount paid to the non-resident and remitted into the government treasury by the recipient of service in India or to the permanent establishment of a non-resident in India. [Sec 163 of the Finance Act 2016].
The Income Tax Act and the Equalisation Levy are synchronised to avoid a double levy of direct tax in India. There is an exemption for a non-resident under the Income Tax Act where an equalisation levy is applicable. Thus, compliances u/s 195 are required only where equalisation levy is not applicable. [Sec 10(50) of the Income Tax Act].
A person availing online services (Receiver of OIDAR services) in India and registered under the GST laws would be required to pay GST @18%. The GST so paid under reverse charge would be available to him as an Input Tax Credit under the GST laws.
A person resident in India or a permanent establishment of a non-resident would be liable pay equalisation levy @6% on the services of online advertisement and the same is to be deducted from the amount paid to the non-resident service provider not having a PE in India where the aggregate exceeds INR 1 lac. Where the amount does not exceed INR 1 lac the compliances of withholding tax under Sec 195 of the Income Tax Act would be required to be adhered to.
An online service provider who is a non-resident would have to appoint a representative in India to make the payment of GST in India for the OIDAR services availed by an unregistered person under GST in India.