EY Tax Alert. Executive summary

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1 13 November 2016 EY Tax Alert Place of Provision of Services Rules, Mega Exemption Notification and Service tax Rules amended to tax Online Information and Database Access or Retrieval Services received from overseas service provider Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes four Notifications No 46-49/2016 and Circular No 202/12/2016-ST dated 9 November 2016 issued by the Ministry of Finance in relation to online information and database access or retrieval services ( OIDAR ). Amendments have been made under various provisions as follows: Place of Provision of Services Rules, 2012 (Notification 46/2016) Mega Exemption Notification (Notification 47/2016) Service tax Rules, 1994 (Notification 48/2016) Reverse mechanism (Notification 49/2016) Key changes effective from 1 December 2016 are as under: Definition of OIDAR services is expanded to include electronic services such as advertising on the internet, providing cloud services, online supply of digital content, digital data storage, online gaming etc. Place of provision of OIDAR services shall be the location of service recipient, resulting in such services (i.e. B2B transactions) becoming taxable under reverse mechanism. Exemption provided to services received by Government, local authority, governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession located in taxable territory and provided by overseas service provider shall not apply to OIDAR services. Accordingly, OIDAR services for B2C transactions shall be taxable. Liability to pay service tax in such cases (i.e. B2C transactions) shall be shifted to overseas service provider.

2 Background rule 3 of PoPS is amended. This proviso shall not apply in case of OIDAR services. Presently, services 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 from overseas service provider are exempt from service tax 2 (cross border B2C transactions). Service tax is payable under reverse mechanism in case of import of services for B2B transactions. Amendment in Mega Exemption Notification (Notification: 47/2016) Exemption provided to services 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 and provided by overseas service provider shall not apply to OIDAR services. Further, as per rule 9(b) of Place of Provision of Services Rules, 2012 ( PoPS ), place of provision for online information and database access or retrieval services ( OIDAR ) is the location of the service provider. Accordingly, cross border B2C OIDAR services provided in the taxable territory will be liable to service tax. This exemption is withdrawn with effect from 1 December Accordingly, such cross border OIDAR services provided by overseas service provider and received by a person in taxable territory are not subject to service tax. Vide Notifications and Circular 3 both dated 9 November 2016, amendments have been made to PoPS Rules, Service Tax Rules, 1994 ( ST Rules ) and in Notifications dealing with exemption and reverse in relation to OIDAR services. The amendments shall take effect from 1 December Amendment in PoPS Rules (Notification: 46/2016) Clause (b) of rule 9 of PoPS Rules is deleted w.e.f 1 December Amendment in ST Rules (Notification: 48/2016) Non-assesse online recipient is defined in rule 2(ccba) of ST Rules to mean a Government, a local authority, a governmental authority or an individual receiving OIDAR services in relation to any purpose other than commerce, industry or any other business or profession, located in taxable territory. Existing definition of OIDAR service is redefined under rule 2(ccd) of ST Rules, to mean services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology and includes electronic services such as,- Accordingly, default rule 3 shall apply and place of provision of service in case of OIDAR services shall be the location of service recipient. Further, proviso 4 to advertising on the internet; providing cloud services; provision of e-books, movie, music, software and other intangibles via 2 As per Entry 34 of Mega Exemption Notification No 25/2012 dated 20 June Circular No 202/12/2016-ST dated 9 November In cases other than OIDAR services, where location of service receiver is not available in the ordinary course of business, place of provision of service to be location of provider.

3 telecommunication networks or internet; providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network; online supplies of digital content (movies, television shows, music, etc.); digital data storage; and online gaming. An indicative list and illustrations of OIDAR services is provided in the Circular. from overseas service provider and providing such services to the nonassesse online recipient except when such intermediary satisfies all the prescribed conditions 6. Thus, Circular clarifies that if the intermediary successfully establishes that he is merely an intermediary by satisfying all the prescribed conditions, actual OIDAR service provider shall be required to register and dis service tax. However, if the intermediary does not satisfy the conditions, he will be deemed to be providing OIDAR services. OIDAR services will not include the following: Illustrations where an intermediary shall be deemed to be a service provider of OIDAR services are given in the Circular. Supplies of goods, where the order and processing is done electronically Supplies of physical books, newsletters, newspapers or journals Services of lawyers and financial consultants who advise clients through Booking services or tickets to entertainment events, hotel accommodation or car hire Educational or professional courses, where the content is delivered by a teacher over the internet or an electronic network (in other words, using a remote link) Offline physical repair services of computer equipment Advertising services in newspapers, on posters and on television For reverse mechanism amendment is carried out in rule 2(d)(i)(H) to exclude B2C transactions of OIDAR services. Person liable to pay service tax in relation to OIDAR services for B2C transactions shall be the service provider. An oversea intermediary 5 shall be deemed to be receiving OIDAR services Any person located in taxable territory representing overseas service provider shall be the person liable to pay service tax. If the service provider does not have a physical presence or does not have a representative for any purpose in the taxable territory, the service provider may appoint a person in the taxable territory for the purpose of paying service tax. Person receiving OIDAR services shall be deemed to be located in the taxable territory if any two of the following noncontradictory conditions are satisfied: the location of address presented by the service recipient via internet is in taxable territory; credit/debit/any other card by which the service recipient settles payment has been issued in the taxable territory service recipient s billing address is in the taxable territory 5 Including an electronic platform, a broker, an agent or any other person, by whatever name called, who arranges or facilitates provision of such service but does not provides the main service on his account 6 Conditions prescribed include issuance of invoice with specific details by intermediary, he neither collects nor processes payment, intermediary does not authorise delivery, general terms and conditions are not set by intermediary.

4 internet protocol address of the device used by the service recipient is in the taxable territory; service recipient s bank in which the account used for payment is maintained is in the taxable territory; country code of the subscriber identity module (SIM) card used by the service recipient is of taxable territory; location of the service recipients fixed land line through which the service is received by the person, is in taxable territory Procedural aspects Circular clarifies that LTU unit, Bengaluru under CBEC 7 would be administrative authority for the purpose of administration of overseas service provider providing cross border OIDAR services to non-assessee online recipient in taxable territory. Detailed process for registration, claiming small scale exemption, point of taxation, eligibility to avail input tax credit, rate of exchange to be applied, record keeping and payment are also provided in the Circular. To summarise It has been specified that service recipient shall be deemed to be a nonassesse online recipient, if such person does not have service tax registration. Taxability of OIDAR services provided to service recipients in taxable territory from 1 December 2016 is as follows: Overseas service provider liable for paying service tax may make an application for registration in form ST- 1A within 30 days from 1 December Transaction B2B Indian service provider Forward Overseas service provider Reverse Registration shall be deemed to be granted in form ST-2A from the date of receipt of the application. B2C or B2G Forward Forward Format for Form ST-1A and ST-3C for registration and return respectively are also prescribed. Amendment in Notification relating to reverse mechanism (Notification: 49/2016) Reverse Notification No 30/2012 dated 20 June 2012 is amended with effect from 1 December 2016 to exclude B2C transactions in case of OIDAR services. Cross-border B2B services shall continue to be taxable under reverse mechanism. 7 Central Board of Excise & Customs

5 Comments Vide these Notifications, Government has significantly widened the scope of OIDAR services by including array of services provided with the use of technology and bringing the said services provided by overseas suppliers within the tax ambit. In the report released by OECD on the first action plan addressing tax challenges of digital economy in cross border transactions, it had emphasised on a requirement for non-resident supplier, particularly for B2C supplies, to register, collect and remit tax in the jurisdiction of the consumer. The amendment seems to be in line with the recommendations on BEPS. Overseas service providers and intermediaries will need to identify if the service recipient is non-assessee online recipient so as to comply with the administrative requirement. Government seems to have aligned the PoPS Rules for OIDAR services with draft place of supply provisions under the proposed GST regime.

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