GST authorities warned foreign tech firms about GST implications to avoid not-so-good surprises

The Central Board of Indirect Taxes and Customs (CBIC) have recently started sending emails to the fintech firms, gaming and content service providers operating from foreign countries such as the United States, Malta and Curacao.

These emails consist of information flyers that educate the overseas firms about Indian Goods and Services Tax (GST) implications and spare them from any not-so-good surprises later on. The CBIC’s Bangalore nodal office has sent these emails.

The offshore firms are mainly operating in the Business-to-Consumer (B2C) segment. These companies provide educational services, entertainment and online trading services to the Indian residents. No basic threshold limit criteria are applicable for overseas transactions subject to GST. They are also classified as the Online Information Database Access and Retrieval (OIDAR) services that sell services over the internet. The recipients get these services rendered over the internet without any physical interaction.

GST applies to any automated services that do not have human intervention. Accordingly, GST becomes applicable on online educational services or offshore crypto trading and gaming platforms, except for any classroom teaching conducted live in overseas institutions. 

Many tax experts have opined that it is a good initiative to educate and create awareness about taxation among online service providers operating from foreign lands. Likewise, it is also crucial to provide compliance incentives to foreign companies to operate and comply smoothly without hassles in the future. Such incentives include an amnesty scheme for waiving taxes, late fees and interest arising from the past periods.

Two years ago, the matter came to the limelight when many foreign companies received notices via email from the Indian GST authorities. Hence, a few companies paid taxes and closed the matter. However, a few companies raised questions about the emails being used to communicate with foreign companies for serving notices. A legal practitioner mentioned that such notices should have been routed via the local government since the Indian tax authority does not have jurisdiction over their land.

A few companies also ended up paying penalties amounting to 15% of the tax evaded. They gave in, fearing that local tax authorities may need their disclosure in the returns. Further, these foreign service providers were not well established to be spending massive money on litigations.

The reverse charge mechanism applies to B2C transactions provided by resident online service providers registered under GST in India. It is because OIDAR falls under the list of reverse charge transactions. Accordingly, the service recipient or goods deposits GST with the government instead of the vendor. However, it currently applies only to a notified set of services.

The GST charge on the OIDAR service bears similarity to the Income Tax law’s equalisation levy of 2%. The law was introduced in 2016 vide the Finance Act. The aim was to resolve the taxation issues arising due to digitalisation growth. Such equalisation levy paid cannot be set off against the tax paid in the home country of a non-resident. Further, an equalisation levy was charged in cases where no income tax was paid by such business in the countries where it operates. Overall, both the equalisation levy and GST increase the price of foreign services paid by Indian consumers.

For any clarifications/feedback on the topic, please contact the writer at annapoorna.m@cleartax.in