New GST rules to tighten compliance for foreign digital service providers

Starting October 1, foreign companies such as Netflix, Spotify, and Hotstar, providing a wide range of digital services to users in India, will face stricter compliance norms on goods and services tax (GST).

They will have to pay 18 per cent GST regardless of business or personal consumption. Until now, foreign firms providing service to non-GST registered recipients such as the central and state governments and individuals for any purpose other than business were exempt from the tax.

The Central Board of Indirect Taxes and Customs (CBIC) on Wednesday notified the “exemptions will no longer be applicable to OIDAR, or Online Information and Database and Retrieval Services”.

The apex indirect tax body has clarified this while exempting 5 per cent integrated GST on goods imported through ocean freight. The move will help sleuths to enforce the tax on foreign firms by nudging them to be GST-compliant through registering themselves, remitting taxes, and filing returns under GST provisions.

According to tax officials, there are revenue streams/channel partners through which these firms sell services that are not covered under GST since, until now, it is not mandatory to levy the tax on unregistered recipients, which include a large consumer base.

With this the OIDAR rule will cover all revenue streams of service. This will remove ambiguity, improve overall compliance in the digital space, and plug loopholes.

OIDAR enlists certain illustrative services such as advertising, cloud services, e-books, movie, music, software, data/information retrieval services, data storage and online gaming services rendered through online/internet mediums.

The CBIC notification is in line with the proposed amendment made in the Finance Act, 2023, in which the definition of “non-taxable online recipient” under the Integrated GST Act has been revised to widen the scope of OIDAR.

Any overseas supplier involved in rendering such services to Indian consumers will follow a simplified registration process under the GST law, either directly or through representatives in India, and be tax-compliant including paying IGST of 18 per cent on a forward charge basis (the onus is on supplier of services for collecting tax from recipient and remitting it to the government).

Experts say foreign OIDAR service providers such as OTT (over the top) platforms and social media platforms earn substantial revenue from their Indian customer base. For instance, Netflix, Inc, headquartered in the United States, has a significant user presence in India and is subject to IGST on sales to unregistered individuals, necessitating comprehensive record-keeping practices.

Besides, online education services, gaming, and advertising, which were earlier argued to be outside the scope of OIDAR services, will now fall within the amended definition, the official cited above said.

Saurabh Agarwal, tax partner, EY, said: “Previously, ‘non-taxable online recipients’ referred to entities such as government bodies, local authorities, governmental agencies, or individuals receiving OIDAR services for purposes other than commerce, industry, or business, and located in the taxable territory. The definition of ‘non-taxable online recipients’ was revised to mean any unregistered person receiving OIDAR services, regardless of the purpose, and located in the taxable territory. This change eliminates the requirement to consider whether the services are received for business purposes or not, making OIDAR services taxable for foreign service providers when provided to unregistered individuals in India, effective from October 1, 2023.”

OIDAR service providers now need to analyse the impact of this. Live streaming of events and classes might still continue to be exempt but providing access to the library or recorded videos would be subject to GST. Business Standard