The Central Board of Indirect Taxes and Customs has issued a notification that could subject major companies like Facebook, X (formerly Twitter), Google, and several edtech firms to an integrated goods and services tax (IGST) of up to 18 percent. This tax would apply to services offered to both government entities and individuals in India, ending exemptions that were previously in place.
End of Exemptions for OIDAR Service Providers
Overseas Online Information and Database Access Retrieval (OIDAR) service providers, which include the aforementioned tech giants, may soon face the additional IGST following the proposed end of exemptions starting from October 1.
The Central Board of Indirect Taxes and Customs clarified through the notification that OIDAR service providers would no longer be exempt from IGST. This change will affect a wide range of overseas companies providing services such as advertising, cloud services, music streaming, subscription-based services, online education, and information services, whether used for personal or business purposes.
Previous Taxation Rules
Previously, services provided by overseas OIDAR providers located in non-taxable territories were exempt from tax when received by government bodies, government authorities, or individuals for non-business purposes. Taxation was primarily applied to business-to-business (B2B) services.
Understanding OIDAR Services
OIDAR services are characterized by their delivery through IT over the internet, often automated and requiring minimal human intervention. These services encompass various offerings such as online advertising, cloud services, e-books, media streaming, digital content sales, data storage, and online gaming.
The scope of taxation for OIDAR services was expanded in the 2023 Finance Act, and the definition was revised to eliminate the requirement for “minimal human intervention” in service delivery. Additionally, the definition of ‘non-taxable online recipient’ was broadened to include non-registered recipients under section 16 of the IGST Act, shifting the responsibility for tax collection to service providers.
To address the ambiguity arising from the 2023 Finance Act changes, this notification removes exemptions for individuals and government entities and mandates that OIDAR service providers maintain a user database.
Impact on Companies
While larger corporations may have already prepared for the compliance adjustments, industry experts suggest that this change could heighten compliance requirements for smaller companies and potentially affect numerous edtech and subscription-based service providers.
Pratik Jain, Partner at PWC, noted that even services involving some degree of human intervention may now fall under this tax bracket, as the term ‘involving minimal human intervention’ has been removed.
