Modi’s Third Surgical Strike – now on foreign ecommerce companies

This year is turning out to be full of surprises and we just can’t expect what else is there in store for us. In another move to ramp up tax avenues and revenues, the Government has sought to levy service tax on online services provided by foreign ecommerce companies to persons other than business entities. And the more interesting part is that service is taxable under forward charge which means that the foreign ecommerce companies will be liable to take registration under the Indian Service tax law and pay service tax. The change is effective from 1 December 2016.

Position till now

The Place of Provision of Services Rules, 2012 (POPS Rules) had a concept of Online information and database access or retrieval (OIDAR) services. OIDAR Services generally included paid access to online information such as trade, legal and other data, books and online news. The POPS of this service was covered by Rule 9 of the POPS Rules and thus the location of service was where the service provider was located.

Thus effectively, where the service provider was in non-taxable territory, the service was not taxable, irrespective of the fact as to who was the recipient of service. Vice-versa the service was taxable where the provider was in taxable territory.

What is the change?

Firstly the scope of the term ‘OIDAR services’ has been expanded to include a whole range of ecommerce services such as online advertising, cloud services, access to online data, digital data storage, etc.

Secondly, the term OIDAR service is being deleted from Rule 9 of the POPS Rules and thus will fall under the residuary Rule 3 (place of provision of service being the location of service recipient).

The changes it will bring in the tax positions are provided below for better understanding.

Service Provider Service Recipient Nature of Services Taxable?
Location Legal Constitution Location upto 30 November w.e.f. 1 December
Taxable Territory Any Taxable Territory OIDAR, Ecommerce & other services Yes (forward charge) Yes (forward charge)
Taxable Territory Any Non Taxable Territory OIDAR Yes (forward charge) No (Export)
Taxable Territory Any Non Taxable Territory Ecommerce & other services No (Export) No (Export)
Non Taxable Territory Business Entity Taxable Territory OIDAR No (outside purview) Yes (Reverse charge)
Non Taxable Territory Business Entity Taxable Territory Ecommerce & other services Yes (Reverse charge) Yes (Reverse charge)
Non Taxable Territory GLI Taxable Territory OIDAR No (Exempt) Yes (Forward charge)
Non Taxable Territory GLI Taxable Territory Ecommerce No (Exempt) Yes (Forward charge)
Non Taxable Territory GLI Taxable Territory Other Services No (Exempt) No (Exempt)

*GLI refers to Government, a local authority, a governmental authority or an individual who receives services in relation to any purpose other than commerce, industry or any other business or profession

** OIDAR here refers to old definition of this services and Ecommerce refers to additional services covered in the scope of new definition of OIDAR services.

Why the change?

The Model GST law has a provision for taxing import of services by an individual for personal use beyond a certain monetary limit. The said provision had created some hue and cry and industry had made representations for removing it. By introducing the above change, the Government has basically shown a motive to move towards GST by taxing services imported by individuals as well. Since such transactions are generally made through proper banking channels, it is easy for Government to track them.

Another reason would have been increased online expenditure being done by IT and other companies. This has been leading to significant outflow of foreign exchange. In certain cases, payments are made by promoters through their credit cards and then the expense is booked in the books of the company. Such transactions have also remained outside the tax net or unassessed.

Can Indian Government administer entities located outside India?

No one can forget the Vodafone TDS matter, but lets talk about indirect tax law. As our esteemed readers may recall, the Government had introduced a concept of ‘aggregator’ in 2015. The purpose was to put onus of paying service tax on companies like Ola, Uber, Housejoy, etc. which were aggregating service providers through a mobile app. But does Uber have any office or registration in India? Well no!

Interestingly, the recommendation to introduce a concept of aggregator in service tax law was made by Uber to the Indian Service tax authorities. And the law was amended to provide that in case an aggregator does not have legal presence in India, it can appoint an agent in India to undertake the requisite service tax compliances.

Now there is a difference in Uber complying with the Indian service tax laws and current changes made in the law mandating ecommerce service providers located outside India to comply with Indian tax laws for providing services to GLI in India. An ecommerce service provider, being online, may be providing services to customers in over 200 countries including India.

Thus complying with Indian service tax laws for customers in India would definitely be a hassle for such an ecommerce service provider. In most of the situations, the online company may either not come to know of the new provisions or would not have access to tax professionals for advising them in the complex Indian service tax law.

The Central Board of Excise & Customs (CBEC) have issued a circular in this regard wherein it says that it will try to approach all ecommerce service providers through email asking them to comply. But time will only tell as to how many of them actually pay heed to emails from CBEC. Many emails may just land in junk/spam email folders of ecommerce service providers!

Another interesting matter is that CBEC has clarified foreign ecommerce service providers would fall under the jurisdiction of LTU Bangalore. Lets assume that an ecommerce service providers located in USA is not paying service tax. How will CBEC catch hold of such person is big question to be answered. Even if CBEC issues a notice/order to such non-compliant person, the tax recovery may never happen as the Indian tax authorities will not have any tax jurisdiction over foreign companies and person. India has not been able to bring back even Vijay Malaya who is an Indian citizen, what to speak of getting foreign companies to pay Indian service tax.

The way forward

The intent of the amendment seems to be in line with GST but the taxing a foreign national or a company would rather be very difficult. Government could have made intermediaries such as banks or credit companies liable to pay taxes as CBEC can atleast exercise jurisdiction on them in case of non-payment of taxes. Now we will have to wait and watch whether this third surgical strike foreign ecommerce service providers is as successful as the last two.