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Starting Friday, a major indirect tax change could make e-services more expensive for individuals in India.
The government will charge 15 percent service tax on all things bought from foreign websites including e-books, music, movies, internet advertising, providing cloud services, online games, software and other intangible products, according to a notification by the Central Board of Excise and Customs on 9 November.
This means individuals availing online content and services will now be required to pay a tax to overseas service or content providers.
Tax experts say this will change the manner in which service tax is levied on e-services.
“Earlier, the location of the service provider was considered to be the location of delivery of the service but now it has been changed to the location of the receiver,” said Rohit Jain, partner at tax firm Economic Laws Practice.
This implies that the cost of accessing major online services will increase for all domestic residents but whether companies will be able to pass it on to their customers is still unclear, according to Pratik Shah, partner and head of indirect tax at SKP.
The levy of this e-service tax will substantially increase the revenue base of the government but it’s unclear what this amount will be because the extent of compliance by companies remains to be seen, both Jain and Shah said.
Jain, however, added that large multinational companies will be more than eager to comply with all prevailing tax rules even if the government isn’t able to keep a track on all transactions.
The smaller startups, however, will prove much more difficult to track if they escape the service tax, Jain added.
The entities which are liable to pay tax will have three ways to pay up – find an agent, appoint a representative to submit tax liability or set up a unit in India to specifically deposit taxes. The first two are more feasible; it’s unlikely that the companies will opt to set up offices in the country.
Shah from SKP said that the move will increase hassles for overseas corporations to find agents or representatives but setting up a base in India will be even more cumbersome.
The validity of the service tax can be challenged, said Jain, if foreign companies object to paying taxes in a country where they are not physically present.
“Anyone can challenge it but it is unlikely to be held as a constitutional challenge. Similar provisions are present across European Union countries as well. As long as income is arising in India, the authorities have the right to tax,” he said.
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