18% GST

Foreign companies that provide internet services, including advertising, cloud services, music, and information, to non-GST-registered individuals in the country are now required to pay 18 per cent Integrated Goods and Services Tax (IGST), according to the finance ministry’s order. This order took effect on 1 October, 2023.

These new regulations are going to be liable for all digital firms, including giants like Netflix, Google, Facebook, and Spotify, who are now subject to an 18 per cent integrated GST (IGST), irrespective of whether the services are offered for personal or commercial purposes.

With new norms in place, the government will witness increase in tax collection. On the other hand, it will give rise to changes in consumer behaviour of digital services, including a possible shift from paid services to free alternatives or a reduction in consumption due to the increased cost. These amendments to the regulations are also expect to increase the compliance burden for these service providers since they will be required to register for GST, remit taxes, and file returns.

While explaining the impact of new regulations on pricing and cost structure, Pratap Daruka, chief financial officer of Tredence said, “In the digital realm, the recent introduction of an 18 per cent IGST casts a profound ripple across pricing and cost structures. With the escalation in costs, we may witness a drift towards free alternatives or even a reduction in consumption as consumers weigh value against expense. As businesses grapple with these augmented costs, the true challenge lies in striking an equilibrium: sustaining profitability while ensuring services remain affordable and enticing”.

To ensure compliance with the new regulations and avoid potential legal or financial consequences for non-compliance, the digital industry must proactively invest in understanding and adhering to these norms, mitigating the risks of legal or financial repercussions, he added further. 

Formerly, only business-to-business services were liable for IGST. Individuals and government entities were exempt from paying tax on non-business services obtained from overseas Online Information Database Access and Retrieval (OIDAR) service providers based outside of Indian jurisdiction.

Furthermore, Ranjeet Mahatani, partner at Dhruva Advisors said, “The primary concern for the industry is to determine whether the supply is covered by the amended definition of OIDAR services. Next, the issue is to determine who is liable to pay the applicable GST—if it is the service provider, what sort of information and documents he or she is obliged to gather from the recipient of the services,” while talking about the challenges of the removal of exemption from IGST for IT services.

It should be noted that, OIDAR services were first liable for indirect taxation under the service tax framework in 2001 In India. With the expansion of the online space in 2016, the scope of these services was also expanded. Furthermore, Section 16 of the IGST Act widened the definition of ‘non-taxable online recipient’ to include unregistered recipients, shifting the burden of tax collection to service providers.