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:

1. Advertising on the internet;
2. Providing cloud services;
3. Provision of e-books, movie, music, software and other intangibles via telecommunication networks or internet;
4. Providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network;
5. Online supplies of digital content (movies, television shows, music, etc);
6. Digital data storage; and
7. 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

1. Government agencies, individuals utilizing online information and database access or retrieval services for personal use have been defined as “non-assessee online recipients”.
2. 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.
3. Any person representing the overseas service provider shall be the person liable to pay Service tax in India;
4. 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.