India is set to introduce a significant tax change that will impact the import of online services for personal use from offshore digital services companies, including software sellers, content streaming platforms, and social media firms. Starting from October 1, 2023, these services will be subject to an 18% Integrated Goods and Services Tax (GST), according to a finance ministry order that implements tax changes introduced in this year’s budget.
This notification marks a substantial shift in the tax regime governing non-resident digital service providers, often referred to as ‘Online Information Database Access and Retrieval (OIDAR)’ services. In the Finance Act, the Indian government removed a tax exemption for the import of OIDAR services for personal use. Consequently, the responsibility for collecting and remitting the tax to the Indian government now rests with the service exporter.
Under the previous regime, the tax exemption applied to imports of these services for personal use, and the liability to remit the tax to the government fell on the consumer if they were a GST registered person importing the service for business purposes. However, it was challenging for Indian tax authorities to differentiate between personal and business use, making tax collection complicated. Shifting the tax payment responsibility to the exporting firm in the case of personal users simplifies the tax collection process.
Saurabh Agarwal, Tax Partner at EY, explained that the amendment specifies that the exemption for OIDAR services will no longer apply starting from October 1, 2023. Consequently, OIDAR services provided to individuals, as well as Central government, state government, and government authority entities for non-business purposes, will be subject to taxation. This change is expected to boost government revenue, especially from social media platforms, online search engines, and other digital economy firms that serve Indian customers through offshore subsidiaries.
OIDAR services are defined by law as services delivered through IT over the internet, typically automated and requiring minimal human intervention. These services encompass various offerings, including internet advertising, cloud services, e-books, movies, music and software provision, digital content supply, data storage, and online gaming.
This tax change aligns with India’s efforts to ensure fair taxation in the digital economy and underscores the government’s commitment to regulating the taxation of offshore digital services used by Indian consumers for personal purposes.
