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India: Nonresident E-Services Providers Required to Register for Service Tax Effective December 1, 2016

Nov 21, 2016
From KPMG TaxWatch

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Recently, the Government of India issued several Notifications amending the Service Tax rules applicable to the provision of electronic services (e-services) by nonresident vendors to final consumers (B2C transactions) in India effective December 1, 2016.

India levies a federal consumption tax on the provision of services sourced in India. According to the Service Tax sourcing rule currently in place, online information and database access or retrieval services (or “e-services”) are sourced to where the service provider is located. Therefore, e-services provided by a nonresident vendor to a consumer in India are currently not subject to Service Tax. The Notifications amend the sourcing rules so that e-services provided to a customer in India are subject to Service Tax and the nonresident vendor is liable to register, collect and pay the Service Tax. This change is in line with the OECD proposal in BEPS Action 1 and a global trend of similar changes in various other countries.

The new rules are only applicable to sales of e-services to a B2C customer. According to the Notifications, a B2C customer is the Government of India, a local authority, a governmental authority, or an individual availing the services for personal consumption. A person will be considered a B2C customer if such a person is not registered for service tax purposes. E-services are defined as services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their sale essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology. E-services include (1) advertising on the internet; (2) providing cloud services; (3) providing e-books, movie, music, software and other intangibles via telecommunication networks or internet; (4) providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network; (5) online sales of digital content (movies, television shows, music, etc.); (6) digital data storage; and (7) online gaming. For sales of such services to a business customer (B2B transaction), the business recipient in India will be liable to self-assess the service tax.

Nonresident vendors selling B2C e-services will be required to register for and charge service tax for sales made to consumers established in India unless the sales are made via an intermediary, in which case, the intermediary will be liable to comply with the new rules.

A consumer will be deemed established in India if any two of the following conditions are satisfied: (1) the address presented by the service recipient via internet is in India; (2) the credit card, debit card, store value card, charge card or any other card by which the service recipient settles payment has been issued in India; (3) the service recipient’s billing address is in India; (4) the internet protocol address of the device used by the service recipient is in India; (5) the service recipient’s bank in which the account used for payment is maintained is in India; (6) the country code of the subscriber identity module (SIM) card used by the service recipient is India; or (7) the location of the service recipient’s fixed land line is in India.

Nonresident B2C e-services vendors will be required to register for Service Tax if their taxable sales in India are above INR 900,000 ($13,300) per year. Application needs to be made within 30 days of the service becoming taxable. The nonresident may appoint a domestic person as its fiscal representative to comply with the Service Tax. In this case, the representative will be the person liable under the new rules. If the electronic services are provided to individuals via foreign intermediaries (e.g., online marketplaces), such intermediaries will be required to comply with the new rules. For more information, please contact Frank B. Sangster at 267-256-1680 or Sandy Nicolson at 408-367-2801.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.