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New Provisions and their Implications on Service Tax

Starting from December 1st 2016 a set of notifications that were issued on 9 November 2016 comes into effect to levy service tax on downloads. various digital services, and database access, provided from outside India. This paper examines the new provisions and their implications.

The changes have been made by

• Changing the ‘place of supply’ of ‘online database access or retrieval’ service; and
• Expanding the meaning of ‘online database access or retrieval’.

Further, the exemption for import of these services by government departments or by an individual for non-commercial purposes has been removed, and the liability in such cases has been placed on the service provider.

Background

Levy of service tax on services provided in the taxable territory

Service tax is levied under section 66B of the Finance Act 1994 as follows:

Section 66B. Charge of service tax on and after Finance Act, 2012. —There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.

Thus, under section 66B of the Finance Act 1994, service tax is levied on “services provided in the taxable territory”. (underlining added)

How to determine where a service is provided

Whether or not a service is provided in the taxable territory is not left to commonsense determination. Rather, there is a provision of law:

SECTION 66C. Determination of place of provision of service. — (1) The Central Government may, having regard to the nature and description of various services, by rules made in this regard, determine the place where such services are provided or deemed to have been provided or agreed to be provided or deemed to have been agreed to be provided.

Section 66C thus empowers the central government to make rules to determine where a service is provided or deemed to have been provided.

The central government has made the ‘Place of Provision of Services Rules 2012’ in terms of which there are different criteria for different categories of services for determining where they are considered to be provided. The general, or default, rule (Rule 3 of the said Rules) is that a service is considered as provided in the location of the recipient of service.

Database services: Supplier’s location was place of supply

The default rule that service is considered to be provided at the location of the customer follows from the dictum that service tax is a destination-based consumption tax. However there are exceptions to this general rule. Among them is Rule 9, which till 30 November 2016 stood as follows:

RULE 9. Place of provision of specified services. — The place of provision of following services shall be the location of the service provider :-
(a) …
(b) Online information and database access or retrieval services;
(c) …
(d) …

Accordingly, online information and database access or retrieval services were considered as provided in the location of the service provider, and if the service provider was outside India, then the service was not taxable in India even though it was used in India. By these means, paid access to online information or database was
kept out of the ‘import’ of service provisions.

Other digital services: Recipient’s location was place of supply, but individual was exempted from reverse charge

As far as other digital services are concerned, their ‘import’ was taxable even prior to the changes now made. The recipient of the service had to pay tax on reverse charge basis by virtue of Rule 2(d)(i)(G) of the Service Tax Rules 1994, which defines ‘person liable to pay service tax’ in respect of imported service as follows:

“in relation to any taxable service provided or agreed to be provided by any person which is located in a non-taxable territory and received by any person located in the taxable territory, the recipient of such service.”

In terms of this, the person who receives the service provided from outside India is the person liable to pay service tax on the service. The reverse charge notification 30/2004-ST made the recipient of service liable for paying the entire service tax on the transaction (not part of it as was the case in some services under reverse charge).

However notification 25/2012-ST exempted the individual who received the service for non-commercial use from payment of service tax.

The Changes made W.E.F. 1 December 2016

The changes made on 9 November 2016, effective from 1 December 2016, (i) change the place of supply of online database services, (ii) expand the definition of such services to include more than the terms normally encompass, and (iii) remove the exemption for such services received by government / individuals for non-commercial purposes; (iv) make the supplier of service liable for payment of this service tax on services received by government / individuals for non-commercial purposes.

Summary of Changes

The major changes, with their source documents, are as follows:

  • Online database or information access or retrieval in the taxable territory, when the service is provided from abroad, is now taxable as an imported service. (Source: Change in Rule 9 of the Place of Provision Rules 2012, by notification 46/2016-ST http://cbec.gov.in/resources//htdocs-servicetax/st-notifications/st-notifications-2016/st46-2016.pdf

  • The term ‘online database access or retrieval’ has been re-defined by artificial expansion of its meaning. The meaning of the term for service tax will now include other services like internet advertising, gaming, cloud services, digital storage, music and e-book downloads. [Source: New definition inserted in Service Tax Rules 1994 as Rule 2(1)(ccd) by notification 48/2016-ST http://cbec.gov.in/resources//htdocs-servicetax/st-notifications/st-notifications-2016/st48-2016.pdf

  • Reverse charge applies to all these, with the exception of some categories of recipients. [Reverse charge on service received in India is as per Rule 2(G) of the Service Tax Rules 1994 read with notification 30/2012-ST. The exceptions are now specified in notification 30/2012-ST as amended by notification 49/2012-ST http://cbec.gov.in/resources//htdocs-servicetax/st-notifications/st-notifications-2016/st49-2016.pdf

  • Government departments and individuals who receive the services for non-commercial, non-business and non-professional use comprise the category excluded from reverse charge. These are not liable to pay tax on these services received by them. They are designated as “non-assessee online recipients”. The term is defined in the new clause (ccba) inserted in Rule 2(1) of the Service Tax Rules 1994 by notification 48/2016-ST http://cbec.gov.in/resources//htdocs-servicetax/st-notifications/st-notifications-2016/st48-2016.pdf The exclusion is as per amended notification 30/2004-ST (see previous bullet point).

  • In case of receipt of services by “non-assessee online recipients”, the service provider is liable to pay service tax. If it has no presence in India, it is to appoint an agent for service tax compliance.[Source: amendments in the Service Tax Rules 1994 by notification 48/2016-ST http://cbec.gov.in/resources//htdocs-servicetax/st-notifications/st-notifications-2016/st48-2016.pdf

  • The exemption for services received by individuals for non-commercial use has been removed in respect of these services. [Notification 25/2012-ST amended by notification http://cbec.gov.in/resources//htdocs-servicetax/st-notifications/st-notifications-2016/st47-2016.pdf The services will be taxable, but not in the hands of the individuals. The provisions for ‘non-assessee online recipients’ of the service will apply. (See above.)

  • Enforcement of the New Provisions

    For services provided to “non-assessee online recipients” of the designated services from outside India, the service provider outside India has been made liable to pay service tax. If he has no presence in India, he is required to appoint an agent for the purpose.

    In the normal course the law provides a method for enforcement of tax dues. Section 87 of the Finance Act 1994 gives the central government powers to recover tax dues by various methods including detention and sale of property belonging to the defaulter. However, if the defaulter is located in another country it would not be possible to implement this extreme method. The provision of law may thus remain on the statute book as a toothless device.

    Are e-books services?

    The term ‘online database access or retrieval’ has, from 1 December, been expanded to cover the following:

    (i) Advertising on the internet;
    (ii) Providing cloud services;
    (iii) Provision of e-books, movie, music, software and other intangibles via telecommunication networks or internet;
    (iv) Providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network;
    (v) Online supplies of digital content (movies, television shows, music, etc.);
    (vi) Digital data storage; and
    (vii) Online gaming;

    This has been understood to mean that downloads of e-books and music are covered as service. In fact, in terms of the wording of the law, the provision of these by electronic means is service, and the downloads at the hands of the recipient get taxed on reverse charge basis. However, the whole value will be taxed, including content as well as the actual taxable service of provision of content by electronic means.

    It is notable that the same content, if delivered as physical media, would be treated as goods. The download too, as soon as it is complete, takes physical form as words or sound. It becomes inalienably the property of the recipient, and even the provider / IP owner has no right to take it back or erase it from the media belonging to the recipient. In these circumstances, treating the whole value of the download as value of service may result in legal controversies.

    Content Courtesy:

    Ms. Radha Arun
    Consultants to Udyog Software (India) Ltd.
    radha.arjuni@gmail.com

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