Service Tax on Online Services

Services provided online like Software As A Service (SAAS) or services that extensively use the internet for delivery of services are mostly classified as “Online Information and Database Access or Retrieval Services” (OIDAR). In this article, we look at the applicability of service tax on “Online Information and Database Access or Retrieval Services” (OIDAR).

Online Services - OIDAR Services

“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. There has been a recent modification to the definition of OIDAR services with effect from December 1st, 2016, as follows: “Online information and database access or retrieval services” refers to services whose delivery is mediated by information technology over the internet or an electronic net work and the nature of which permits their supply to be fundamentally automated and involving minimal human intervention, and not possible to guarantee in the nonexistence of information technology and includes electronic services such as:

Advertising on the internet;
Providing cloud services;
Provision of e-books, movie, music, software and other intangibles via telecommunication networks or internet;
Providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network;
Online supplies of digital content (movies, television shows, music, etc);
Digital data storage; and
Online gaming

Hence, there are two key features for a service to be classified as and online information and database access or retrieval services:

Provision of Service via Information Technology (utilizing internet or other electronic network); and
Automatic delivery of such service, i.e., with minimum human intervention

Service Tax on Online Services

Service tax on online information and database access or retrieval services are governed by Place of Provision of Services Rules. As per the Place of Provision of Services Rules, the place of supply is the location of the service recipient for online service listed in this article. Hence, this change effectively means that online information and database access or retrieval services supplied by foreign service provider will now be taxable. However, governmental authorities and individuals related to personal use have been provided exemption from service tax liability under this regulation.

Highlights of Notification No 48/2016-ST - Amended Service Tax Rules

Government agencies, individuals utilizing online information and database access or retrieval services for personal use have been defined as “non-assessee online recipients”.
B2C online information and database access or retrieval services transactions have been removed from reverse charge mechanism and the service provider has been made legally responsible to pay service tax.
Any person representing the overseas service provider shall be the person liable to pay Service tax in India;
Persons who receive online information and database access or retrieval services are deemed to be located in the taxable territory - if any two of the subsequent non-contradictory conditions are satisfied:
- The location of address that is presented by the service recipient via internet is in taxable territory;
- Credit or debit or any other card by which the service recipient settles payment has been issued in the taxable territory;
- Service recipient’s billing address is in the taxable territory;
- Internet protocol address of the device utilized by the service recipient is in the taxable territory;
- Service recipient’s bank in which the account utilized for payment is maintained is in the taxable territory;
- Country code of the subscriber identity module (SIM) card utilized by the service recipient is of taxable territory; and
- Location of the service recipients fixed land line through which the service is received by the person, is in taxable territory.

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Frequently Asked Questions

OIDAR services refer to "Online Information and Database Access or Retrieval Services" which are services delivered through the internet or an electronic network, with minimal human intervention. Examples include advertising on the internet, providing cloud services, e-books, movies, music, software, and other digital content.

The two key features of OIDAR services are: 1) Provision of service via information technology (utilizing internet or other electronic network), and 2) Automatic delivery of such service with minimal human intervention.

For B2C transactions, the service provider is legally responsible to pay service tax on OIDAR services. For B2B transactions, the service recipient may be liable to pay service tax under reverse charge mechanism, depending on the specific circumstances.

Yes, governmental authorities and individuals utilizing OIDAR services for personal use have been exempted from service tax liability under the notification.

The place of supply for OIDAR services is determined based on the location of the service recipient. If the service recipient is located in the taxable territory, the service is subject to service tax in India.

The location of the service recipient is determined based on factors such as the address provided by the recipient, the location of the credit/debit card used for payment, the billing address, the IP address of the device used, the location of the recipient's bank, and the country code of the SIM card used.

Yes, foreign service providers supplying OIDAR services to recipients located in the taxable territory are required to pay service tax in India. They may appoint a representative person in India to comply with the service tax requirements.

The recent modification has expanded the scope of OIDAR services and clarified the conditions for determining the location of the service recipient. This change effectively makes online information and database access or retrieval services supplied by foreign service providers taxable in India.

The service tax liability for OIDAR services arises based on the Place of Provision of Services Rules. If the service recipient is located in the taxable territory (India), the service is subject to service tax, irrespective of the location of the service provider.

The service tax rules on OIDAR services aim to bring online services provided by foreign entities within the ambit of service tax in India. This ensures a level playing field for domestic service providers and promotes tax compliance in the digital economy.