Cross border online services: A drastic amendment

1. INTRODUCTION

The Centre Government (CG) on November 09, 2016 has notified four Service tax related notifications. These notifications withdraw the service tax exemption relating to import of B2C Online Information and Database Access or Retrieval (OIDAR) Services.

Under the existing regime of service tax, any B2C service received from Non Taxable territory (NTT) by Government, Individual, etc., for non business use is exempted through clause (a) of entry no 34 of the Mega Exemption. The entry says no service tax on “services received from a provider of service located in a NTT by Government, a Local authority, a Governmental authority or an Individual in relation to any purpose other than commerce, industry or any other business or profession.”

However, this entry is inoperative for import of OIDAR service, as the place of provision of such service is location of service provider viz. NTT. Therefore, there is no question of exemption as the service tax is not levied on such service.

This article provides the detailed analysis on all such notifications issued by the CG and circular issued in this regard by CBEC.

2. NOTIFICATIONS AND THERE EFFECTIVE DATE OF IMPLEMENTATION

3.CHANGE IN THE DEFINITION OF OIDAR SERVICE:

The existing definition of OIDAR service is provided under rule 2(I) of the Place of Provision of Service Rules 2012, which has been substituted by the new definition. The comparative analysis of definition is as under:

We can compare that the scope of OIDAR service has been enlarged under the new definition. The inclusive list in the definition (i.e. includes any electronic service) may call lot of interpretation and unwanted litigation, to settle on to what to include in this service and what not. To provide clarity, the CBEC has enlisted specific services which are included in OIDAR service and also pointed out types of services are not included in OIDAR services.

The OIDAR service includes services which are automatically delivered over the internet or an electronic network, where there is minimal or no human intervention. In practice, this can be done either

2.1 Example of services whether or not OIDAR service

2.2 INDICATIVE LIST OF OIDAR SERVICE

The circular issued to clarify OIDAR service provides the following indicative list of OIDAR services:

1. Website supply, web-hosting, distance maintenance of programmes and equipment;

a. Website hosting and webpage hosting;

b. automated, online and distance maintenance of programmes;

c. remote systems administration;

d. online data warehousing where specific data is stored and retrieved electronically;

e. online supply of on-demand disc space.

2. Supply of software and updating thereof;

a. Accessing or downloading software (including procurement/accountancy programmes and anti-virus software) plus updates;

b. software to block banner adverts showing, otherwise known as Banner blockers;

c. download drivers, such as software that interfaces computers with peripheral equipment (such as printers);

d. online automated installation of filters on websites;

e. Online automated installation of firewalls.

3. Supply of images, text and information and making available of databases;

a. Accessing or downloading desktop themes;

b. accessing or downloading photographic or pictorial images or screensavers;

c. the digitised content of books and other electronic publications;

d. subscription to online newspapers and journals;

e. weblogs and website statistics;

f. online news, traffic information and weather reports;

g. online information generated automatically by software from specific datainput by the customer, such as legal and financial data, (in particular such data as continually updated stock market data, in real time);

h. the provision of advertising space including banner ads on a website/web page;

i. Use of search engines and Internet directories.

4. Supply of music, films and games, including games of chance and gambling games, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events;

a. Accessing or downloading of music on to computers and mobile phones;

b. accessing or downloading of jingles, excerpts, ringtones, or other sounds;

c. accessing or downloading of films;

d. downloading of games on to computers and mobile phones;

e. Accessing automated online games which are dependent on the Internet, or other similar electronic networks, where players are geographically remote from one another.

5. Supply of distance teaching

a. Automated distance teaching dependent on the Internet or similar electronic network to function and the supply of which requires limited or no human intervention, including virtual classrooms, except where the Internet or similar electronic network is used as a tool simply for communication between the teacher and student;

b. Workbooks completed by pupils online and marked automatically, without human intervention.

2.3 INDICATIVE LIST OF NON OIDAR SERVICE

4. CHANGE IN THE PLACE OF PROVISION OF OIDAR SERVICE

The provisions relating to place of provision of service are governed by the Place of Provision of Service Rules 2012. The clause (b) of rule 9 of POPOS rules cover OIDAR service and provide that the place of provision of such service would be the “location of service provider”. Therefore, under the existing regime if the person providing the online services from NTT, service tax would not be levied on such service as the place of provision is not in taxable territory (TT) .

The Notification no 46/2016-ST, has amended the Place of Provision of Services Rules 2012. It rubs out the clause (b) of Rule 9. As a result, the default rule 3 of POPOS rules would be applicable whereby the place of provision of a service is the “location of service receiver”. It means that the cross border B2C/B2B OIDAR services received by any person located in TT will be leviable to service tax.

In order to avoid any confusion, the existing proviso to rule 3 of POPOS rules which provides that the place of provision can be location of service provider, has been made inapplicable for OIDAR services. Therefore in every case the location of service receiver would be the place of provision.

The comparative analysis of rule 3 is as under:

5. CHANGE IN THE MEGA EXEMPTION

The clause (a) of entry no 34 of Mega Exemption exempts service tax on service received by Government, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession (Underlined portion has been defined as non assessee online recipient under rule 2(1) (ccba) of Service tax rules 1994 which is inserted through notification no 48/2016) from a person located in a NTT.

It is important to note that the above entry exempts all type of import services for non business use received by above mentioned persons. The notification no 47/2016 withdraws the OIDAR service exemption by inserting a new proviso to this entry reads as under:

“Provided that the exemption shall not apply to online information and database access or retrieval services received by persons specified in clause (a).”

It means that import of OIDAR service for non business use by abovementioned persons from NTT to TT would not be exempt from service tax. It is important to note that, before this amendment, exemption entry was not operative for OIDAR service, as the place of provision of such service was not in the TT. This clause was applicable for other services, but amendment in the POPOS rules results that the place of provision would be the location of service receiver, therefore, this clause become operative for this service after amendment in POPOS rules. However, the newly inserted proviso takes away the exemption benefit for OIDAR service.

6.AMENDMENT IN REVERSE CHARGE PROVISION

The outcome of the amendment in POPOS rules is that the place of provision of OIDAR service would be the location of service receiver. Therefore, reverse charge would be applicable whenever the OIDAR service is received by the person in the TT from the person in NTT.

Now take a situation where an Individual is downloading antivirus software from the website of Foreign Service provider. As he is receiving the services from NTT and after the amendment in POPOS rules the place of provision of service is in TT (i.e. his location). Therefore, he has to take registration, pay service tax, file return, etc. Even if the liability comes to Rs 1 he need to comply with all the above requirements, as in case of reverse charge no exemption benefit is available.

To avoid such harsh situation an amendment has been brought that in case of B2C (including services to Government, local authority and Governmental authority) transactions the reverse charge would not be applicable and service tax would require to be paid by the service provider located in NTT. The comparison of notification no 30/2012 (Reverse charge original notification) with amendment through notification no 49/2016 is as under:

Necessary amendments relating to reverse charge is also made in rule 2(1) (d) of Service tax rules 1994.

7. LIABILITY OF INTERMEDIARY

If the service is provided through an intermediary located in NTT such intermediary shall deemed to be the person receiving the OIDAR service and it is also deemed that such intermediary shall be the person who provides such services to the non-assessee online recipient. An exception to this rule is also provided, which means that the original service provider would be called as service provider and deeming provision would not be operative in such case. The exception would be operative if intermediary satisfy the following conditions:

a. the invoice or customer’s bill or receipt issued or made available by such intermediary taking part in the supply clearly identifies the service in question, its supplier in non-TT and the service tax registration number of the supplier in TT;

b. the intermediary involved in the supply does not authorise the charge to the customer or take part in its charge i.e. intermediary neither collects or processes payment in any manner nor is responsible for the payment between the non-assesse online recipient and the supplier of such services;

c. the intermediary involved in the supply does not authorise delivery;

d. the general terms and conditions of the supply are not set by the intermediary involved in the supply but by the service provider.

The service provider has an option to appoint a representative in India to comply with all the service tax provisions.

8. SOME KEY DETERMINATION PRINCIPLES

8.1 HOW TO DETERMINE WHETHER THE SERVICE RECIEVER RECIEVEING OIDAR SERVICE IS IN TAXABLE TERRITORY?

If any two of the following conditions are satisfied then person shall be deemed to be in TT. Further, the condition selected should not be contradictory to each other.

1. the location of address presented by the service recipient via internet is in TT;

2. the credit card or debit card or store value card or charge card or smart card or any other card by which the service recipient settles payment has been issued in the TT;

3. the service recipient’s billing address is in the TT;

4. the internet protocol address of the device used by the service recipient is in the TT;

5. the service recipient’s bank in which the account used for payment is maintained is in the TT;

6. the country code of the subscriber identity module (SIM) card used by the service recipient is of TT;

7. the location of the service recipient’s fixed land line through which the service is received by the person, is in TT.

8.2 HOW PERSON IN NTT (SP) DETERMINE WHETHER THE SERVICE RECIEVER IS NON ASSESSE ONLINE RECIPIENT?

The amended rules deemed that the person receiving the service in TT shall be deemed to be non assessee online recipient if such person does not have any service tax registration.

The drafted deeming provision would create lot of problems for the service providers located in NTT. It indirectly mandates them to charge service tax in all cases, because it would be difficult for them to identify, that the person receiving the service is registered under service tax or not. Even though, if the registration number is provided by the service receiver then how they would ensure that the number provided is correct or not.

9. PROCEDURAL CHANGES

As we discussed above that in case of B2C transactions forward charge would be applicable. Therefore, the person who is in NTT is requires to comply with all the compliances under service tax. It is obvious that the person located in NTT may not have a PAN in India therefore it would not be possible for him to apply for registration through PAN based registration process. Therefore, separate set of procedures is also prescribed for such assessee’s.

The following new forms are introduced for such person:

9.1 How many returns are required to be filed and what is the frequency of returns?

The taxable person shall submit a half-yearly return in Form ‘ST-3C’ electronically for the months covered in the half-yearly return by the 25th of the month following the particular half year.

9.2 When does the liability of service provider located in non-TT arise? How would he/she pay the tax?

The liability to pay service tax is determined under Point of Taxation Rules (POTR), 2011 and rule 5 of POTR rule would be applicable in this case.

9.3 What are the provisions relating to invoice?

The rule 4A of Service tax rules has also been amended and special provisions relating to Invoice would be applicable for this service. The following new proviso has been added in rule 4A

“Provided also that in case of online information and database access or retrieval services provided or agreed to be provided in TT by a person located in the non-TT, an invoice, a bill or, as the case may be, challan shall include any document, by whatever name called, whether or not serially numbered, but containing name and address of the person receiving taxable service to the extent available and other information in such documents as required under this sub-rule.”

9.4 How would the service provider in non-TT compute the value of his/her turnover in Indian rupees?

The value of taxable service would be calculated on the basis of the rate of exchange, which shall be the applicable rate of exchange as per the generally accepted accounting principles on the date when point of taxation arises in terms of the Point of Taxation Rules, 2011 [Rule 11 of Service Tax Rules]. The point of taxation in the instant case would generally be earliest of the following three events of issuance of invoice or receipt of payment or completion of provision of service.

9.5 Whether the application for registration and other documents would be required to be submitted in physical form?

Documents, such as copy of certificate of registration/incorporation would be accepted in PDF format, which may be forwarded to the authority granting registration via Email. Further, a simple declaration by the service provider stating and affirming that they would charge service tax from the individual customers in India and deposit the same with Government of India through internet is required.

10.SOME IMPORTANT DISCUSSION ON CIRCULAR CLARIFYING THIS AMENDMENT

10.1 Whether OIDAR services would be considered as non-taxable services for the previous years and benefit of Rs.10 lakh would be available in current financial year?

The circular says that one of the conditions for availing small scale exemption [notification No. 33/2012-ST] is that the aggregate value of taxable services rendered by a provider of taxable service from one or more premises, does not exceed ten lakh rupees in the preceding financial year. Cross border B2C services were taxable. However, such services when provided by a person in NTT to non-assesse online recipient were exempted. If total turnover of such services crossed Rs 10 lakh in previous year, the small exemption benefit would not be admissible.

It appears that this point in the circular is drafted abruptly. Firstly, it says that the cross boarder B2C OIDAR services were taxable. There is difference between leviability and taxability. The item leviable to service tax may be exempt if provided under any exemption notification. A service leviable to service tax may become taxable if no exemption is provided. There was no leviability of service tax on such service as the place of provision was NTT. Therefore, question of exemption or taxability does not arise at all.

Further, if we can assume that the service is exempted service the benefit of exemption is still available to assessee. The definition of the aggregate value provided under notification no 33/2012 does not include exempted service. This point creates unnecessary confusion in mind.

Even in case of Ashok Kumar Mishra V CCE [2014] 43 GST/575/42 taxmann.com 88(New Delhi CESTAT) it was held that since ‘aggregate value’ for purposes of small service provider exemption does not include exempted service and if abatement is allowed vide exemption notifications, said abatement shall also not form part of aggregate value under SSP exemption.

To me the assessee is entitled to exemption of Rs 10 Lakh, if the aggregate turnover, which does not include exempted service, does not exceed Rs 10 lakh in the preceding financial year.

11.CONCLUSION

It appears that the amendment has been brought bearing in mind the upcoming roll out of GST. The way the provisions drafted are in line with the GST provisions. The definition of aggregate value for the purpose of exemption is drafted in line with definition of aggregate turnover provided under draft GST model law which includes exempted service.

The section 3 of Draft GST model law defines the term supply which includes importation of service which may or may not be for personal purpose. The departure from the exemption is an indication that importation of service under GST may not necessary would always cover under reverse charge.

Nevertheless, the Government is working hard to roll out GST by April 01, 2017 and also trying to align the existing taxability with GST.