OIDAR – The lesser known devil

[Jigar Doshi]

Introduction

The digital economy in India is bursting! Measured by any parameter whether usage of internet, app downloads, smartphone usage, India has surpassed even the most developed nations. This is evident from the fact that India’s internet user base is one of the largest in the world. It is anticipated that India will increase the number of internet users to between 750 million and 800 million and double the number of smartphones to between 650 million and 700 million by 2023[1]. This estimation was done before the Covid-19 hit the world. Post the pandemic, thanks to the virtual world becoming real world, the actual numbers exceed the estimations by good margins.

This growth spurt comes with its own set of challenges. The penetration of internet and its usage is to such extent that it is extremely difficult to determine where and how it is being used. This has led to several issues; one of them being tax evasion on service provided through internet.

Online Information and Database Access Retrieval Services or 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 2017, when GST was introduced, OIDAR was carried forward in the new regime. Currently, under GST, OIDAR is defined u/s 2(17) of the IGST Act, 2017. It means and includes:

1. Where delivery is mediated through internet or electronic network;
2. Received by recipient online, without any physical interface

Some common examples of OIDAR are internet advertising, cloud services, provision of e-books, movie, music, software, digital data storage, online gaming etc.

Further, as per Section 13(12) of the IGST Act, 2017, the place of supply of OIDAR services is the location of service recipient barring certain exceptions discussed later in the article.

Public Interest Litigation (PIL) filed before the Apex Court

Recently, in a PIL[2] filed by a Chartered Accountant before the Supreme Court, the issue that was raised was the absence of a robust mechanism to track GST on OIDAR services used by Non NTOR’s (Non Taxable Online Recipients – which means any Government, local authority, governmental authority, an individual or any other person not registered and receiving OIDAR services in relation to any purpose other than business or profession, located in taxable territory). In simple terms the PIL was filed to highlight the absence of any definite mechanics to track B2B OIDAR services supplied by foreign companies to Non NTOR’s in India. Moreover, the petitioner also appealed that the Centre should have a mechanism to verify total receipts earned by foreign online service providers from India and check their GST compliances. The PIL also appealed to either revise GSTR 5[3] or introduce a new return form which would have necessary columns to reflect the GST revenue generated out of services provided to Non NTORs.

Taxability of OIDAR services rendered by Foreign Service providers

In light of the above PIL, this article aims to discuss the taxability of the OIDAR services rendered by foreign service providers to Indian recipients.

The peculiarity of OIDAR services is such that there is no visible goods and/or services; since the medium is internet, it is very easy to skip the tax net. Further, in case the supplier of service is a foreign provider (which is not too rare!) then the service provider does not have any presence in India to comply with GST provisions. In such case, the following scenarios are possible:

1. Where the recipient in India is registered under GST – In this case, since the recipient is registered and is located in India, the recipient shall be liable to pay IGST under Reverse Charge Mechanism (RCM). In case of any tax evasion, the recipient can be tracked and tax can be recovered at a later stage also. Further, any tax evasion can be identified from multiple sources available with authorities such as financials, bank statements etc.

2. Where the recipient in India is not registered under GST (i.e. NTOR) – In such cases, it has been prescribed that the Foreign Service supplier of services shall be the person liable for paying IGST on such supply of services. The Foreign Service provider would have to obtain single registration under the Simplified Registration Scheme in Form GST REG-10.

In case there is a person in India representing such overseas supplier for any purpose, such representative shall get registered and pay IGST on behalf of the supplier.

In case the overseas supplier does not have a physical presence or does not have a representative for any purpose in India, he may appoint a person for the purpose of paying IGST and such person shall be liable for payment of such tax.

3. Where the recipient is not located in India – In such case, there are seven exceptions prescribed in the explanation to Section 13(12) of the IGST Act, 2017, two of which if satisfied, would instigate a deeming provision, according to which the recipient shall be deemed to be in India. Some examples of these exceptions are IP address of the recipient, the location of address presented by the recipient etc. are in India.

Challenges in identifying such OIDAR transactions and subjecting them to GST

Due to the nature of service being such and the quantum of transactions being huge, there is a challenge in identifying and subjecting such transactions to tax. Moreover, especially in the cases where the recipient is a Non NTOR, where GST is liable to be paid by the service recipient, a transparent and robust mechanism needs to be developed which can identify import of OIDAR services and subsequently determine the taxability.

It was discussed in the PIL that foreign social media giants who render services to Indian recipients charge IGST on their invoices raised on NTORs. However, in case such service is rendered to Non NTOR, they do not charge IGST, as the recipient is liable to discharge the same under reverse charge. Considering that these foreign suppliers have their accounts and books maintained outside India, the revenue authorities do not have access to these. Thus, to determine whether the supplier has discharged GST correctly and completely on the revenue generated from Indian recipients, becomes difficult.

Way Forward

To resolve the issue of non-traceability of OIDAR income generated by foreign companies in India, the Government needs to put in right checks and balances. Such checks and balances could be in the form of tech enabled tracker which can track any payments made to foreign companies. This would help in tracking both – the NTOR revenue and the non NTOR revenue. Further, the regulations could be amended, especially in case of non NTOR recipients. A change to auditing standards could be made to identify and highlight any payments made to foreign companies or any expenses booked in foreign currency in the audit report.

At times, the foreign companies are unaware of GST implications on supply of OIDAR services to recipients in India. To resolve this issue, awareness drives must be conducted by the GST department to create awareness on the taxability of OIDAR services, especially where a Foreign Service provider is involved. To reach the right audience, the outreach of such drives must be of international stature.

It should also be noted by the industry that the CBIC is already on its toes and is issuing notices left right and centre in this regard. There have been instances where the board has reached out to the foreign social medial giants to gather information of recipients of their services in India. Basis such information, notices are being issued to Indian assesses demanding GST under RCM be paid in form DRC-03. In most cases the tax and interest liabilities are humongous in quantum (considering GST has been unpaid since July 2017 in a lot of cases) and is costing dearly to the taxpayers. Moreover, even after the tax liability is discharged, the question that will pop up is whether the ITC of such GST paid would be available as credit or not.

To conclude, though the OIDAR industry is gigantic, the tax revenue from it does not resonate the fact. The measures that the CBIC is taking to curb fake invoicing and check tax evasion on domestic transactions should be reciprocated for the international transactions as well. Only then can the country truly derive benefits from the levitating digital economy.

The author is Jigar Doshi – Founding Partner at TMSL – a tax, technology firm and the views are personal.  He can be reached at [email protected]. The article has been co-authored by Nikita Lahoti – Manager at TMSL. Views expressed are strictly personal.

 

[1] https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/McKinsey%20Digital/Our%20Insights/Digital%20India%20Technology%20to%20transform%20a%20connected%20nation/MGI-Digital-India-Report-April-2019.pdf

[2] Pradeep Goyal vs. Union of India & Ors. [TS-105-SC-2021-GST]

[3] GSTR 5 is the return form for non-resident foreign taxpayer