Indian Tax Authorities Informs Foreign Tech Firms of GST to Avoid Unpleasant Shocks

Indian tax authorities are informing gambling, fintech, and content service providers in far-flung jurisdictions such as the United States, Malta, and Curacao about the GST law, to avoid unpleasant shocks later,

The Bangalore nodal office of the Central Board of Indirect Taxes and Customs, which administers the common indirect tax that went into force on July 1, 2017, is sending an email in the form of an information flyer to these offshore business-to-customer (B2C) businesses.

The tax authority has sent out notices to a number of corporations whose platforms are utilized by Indian residents for leisure, trade, and educational purposes.

“While the Indian revenue is educating foreign online service providers on the mandated compliances, it is also critical to incentivize these foreign corporations to carry out compliances —- providing amnesty for past taxes, along with interest and penalties, would go a long way in enabling these corporations to begin compliances in India,” said Uday Pimprikar, National Leader, Indirect Tax, EY.

Notices from the tax agency scared some foreign enterprises away two years ago, when they were ignorant of India’s new levy. While many overseas corporations complied and paid the tax, others questioned the process of sending notices or summonses through email. “The overseas entities were under the notion that such communications must be handled through their respective governments in accordance with international law because the local tax authority does not have jurisdiction,” said a lawyer who specializes in digital services taxation.

In contrast to the Rs 20 lakh threshold for levying GST on domestic firms, the tax is imposed on a variety of cross-border services regardless of the amount.

If the tax office feels the GST was “intentionally avoided,” it might issue a 15 percent penalty. Some of the companies paid the penalty because the amounts were not large enough to justify litigation, but they were unhappy about being labelled “tax evaders” because home country legislation may require them to reveal the information in future regulatory filings.

The services targeted by the GST office fall within the category of Online Information Database Access and Retrieval (OIDAR) services, which are offered via the internet and received by recipients without any physical interaction with the service provider. GST is levied on automated services that need little or no human interaction, according to this definition. Services such as a recorded educational video or gaming platform, or even an offshore bitcoin trading platform, may be subject to GST in certain circumstances; however, it cannot be imposed on a live classroom session held by an overseas university.

So far, overseas B2C players have received emails in this manner. Because OIDAR services fall within the GST’s ‘Reverse Charge Services’ provisions, the beneficiary of the service is liable for GST payment if the service is purchased by a registered business entity in India. While goods and services are taxed at the point of consumption under GST, Reverse Charge means that for recognized categories of supply, the recipient bears the tax responsibility rather than the supplier.

The GST on OIDAR is similar to the 2% ‘equalization levy’ (EL), which was introduced in the Finance Act of 2016 and will be expanded in 2020 to address the tax issues faced by the economy’s rising digitalization. While EL was designed to tax firms that do not pay income tax in the countries where their markets are located, a non-resident business entity cannot deduct the EL expense from the income tax it pays in its home country. The cost of offshore services received by Indian consumers is, however, increased by GST and EL.

Source: Economic Times