India to review rules on how It taxes foreign digital services

An employee works on a laptop at the headquarters of security system developer Staqu Technologies Pvt. in Gurugram, Haryana, India. MUST CREDIT: Bloomberg photo by Anindito Mukherjee

India will review rules to clarify how it will tax foreign companies that provide digital services such as internet advertising, online education, media streaming, news subscriptions and data storage.

Currently, even if they have no other taxable presence in India, foreign service providers must pay an 18% goods and services tax if their offerings are largely automated, involve “minimal human intervention” and are used for non-commercial purposes by an individual consumer, who doesn’t fall under GST.

“These definitions do not consider practical business model scenarios and create unintended consequences,” said Mukesh Butani, a partner at Delhi-based BMR Legal, which represents clients impacted by the tax.

Both rules are under review to reduce interpretation issues and litigation, according to a government statement. In 2019, an Indian tax authority asked Germany-based Springer Nature Customer Service Centre to prove that its e-books and journals purchased online in India were for non-commercial reasons.

It may not be possible for a foreign service provider to find out whether the Indian recipient of online services is using it for personal or business purposes, said Ritesh Kanodia, partner at Mumbai-based ELP Law.

In 2020, tax authorities ruled that US-firm NCS Pearson Inc. would have to pay the levy on online tests as these involve little human intervention. Pearson had argued the tests involved a human scorer and should not be taxed.

India’s tax department issued an explanatory note, but the confusion persists resulting in a large number of tax notices to foreign companies. A petition in India’s Supreme Court has pointed to a lack of information on GST liability of such foreign service providers.

A similar tax rule in the European Union has mitigated confusion via extensive guidance and illustrative lists of non-taxable services. India could do the same for clarity, as well as to improve enforcement and get more foreign suppliers to register under GST, said Pratik Jain, partner at PwC India.



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