Tarun Jain


Introducing the Budget for Financial Year 2023-2024, the Union Finance Minister made several announcements in her speech1 in the Parliament on 1-2-2023. A substantial focus was on onset of varied “digital” innovations and products, “digital public infrastructure for agriculture”, “national digital library for children and adolescents”, “digital epigraphy museum”, “skill India digital platform”, public infrastructure for “digital payments”, being a few of them. Clearly progressive digitalisation of the national outlook and economy appears to be a key message. This appears to be in line with the thrust on all-rounded digitalisation in the past years. The same appears to be true even for tax-related aspects of digital services. Progressively, albeit uniquely in the global outlook, India has been implementing a wide mesh of tax law framework governing digital services. The Budget for Financial Year 2023-2024 appears to be no exception with expansion in that tax net proposed even in this year. This article examines the proposal made in the budget in the wake of the predecessor steps in recent years on taxation of digital services.

Existing tax framework

Taxes on digital services are currently within the span of both direct and indirect taxes. In respect of direct taxes, digital services were traditionally addressed within the existing framework of “fee for technical services”,2 which has been in vogue for long. However, noting the limitations of the laws in the wake of substantial technological advancements and in particular the rising trends of offshore supply of digital services in India, a proposal was made for a new exclusive law for taxing offshore digital services.3 It was in this background that India enacted equalisation levy (EQL) as a distinct tax.4

EQL has had two avatars so far. The original EQL came into force in the year 2016 and was a levy on “consideration for any specified service received or receivable by a person, being a non-resident from (i) a person resident in India and carrying on business or profession; or (ii) a non-resident having a permanent establishment in India”.5 Even though the substantive scope of the 2016 EQL is very wide, pragmatically it is limited in scope owing to its application being notified only qua digital advertisements.

It was, however, in the year 2020 that the scope of EQL was substantially widened with a new charging provision. The 2020 EQL taxes the “consideration received or receivable by an e-commerce operator from e-commerce supply or services made or provided or facilitated by it (i) to a person resident in India; or (ii) to a non-resident in the specified circumstances …; or (iii) to a person who buys such goods or services or both using internet protocol address located in India”.6 The specified circumstances enumerated in the EQL law further expand its scope as they cover “(i) sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India; and (ii) sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India”.7 Clearly, therefore, the imposition of EQL has been a substantive and significant movement in the taxation of digital services in India qua non-residents.

Soon after the 2020 EQL, the income tax law was expanded to further tax non-resident digital service providers under its significant economic presence (SEP) concept. The law provides that the satisfaction of SEP would give rise to a “business connection” of a non-resident in India which will result into “income deemed to accrue or arise in India”,8 thereby resulting into tax liability in India for such non-resident. It is important to note that SEP does not overlap with EQL. Instead the levy of SEP is contingent upon satisfaction of either of two conditions i.e. (a) transaction in respect of any goods, services or property carried out by a non-resident with any person in India (including provision of download of data or software in India) if the aggregate of payments arising from such transaction or transactions exceeds the prescribed amount; or (b) systematic and continuous soliciting of business activities or engaging in interaction with more than prescribed number of users in India. To this end, the Government has notified the threshold of INR 20 million and 0.3 mn users qua (a) and (b) respectively.9 In other words, the SEP seeks to bring within the purview of Indian tax law those non-residents who carry out significant business activities in India. Thus, SEP expands the scope of tax on non-residents, much beyond the coverage of EQL.

In a further expansion to the scope of tax, albeit in a different though related aspect, the income tax law was amended to introduce a new tax in 2022. Christened as virtual digital assets (VDA), which are widely defined, this levy essentially brings to tax income earned from transfer of crypto assets.10 The provision does not discriminate between residents or non-residents and covers within its scope crypto assets (including cryptocurrency), non-fungible tokens (NFTs) and other notified digital assets.11 Arguably crypto is a distinct species from digital services, the introduction of tax on VDA is nonetheless a relevant milestone, as it reflects the progressive expansion of tax on digital economy in the Indian tax system.

The aforesaid reveals that the scope of direct tax on digital economy is indeed very wide. However, most of these developments are recent. Unlike direct taxes, the tax on digital services in the indirect tax frontier have been in existence in India for comparatively earlier. In the pre-GST service tax regime12 a taxable service in the name and style of “online information database access and retrieval” (OIDAR) was introduced, which covered the service of “providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network”. Even though this nomenclature was retained, in the goods and services tax (GST) regime which came into place from July 2017 – the scope of OIDAR was literally rewritten, so much so that OIDAR came to become as the sole repository of virtually all digital services taxed under GST.

Under the GST regime, OIDAR is broadly defined. It means “services whose delivery is mediated by information technology over the internet or an electronic network” and specifically includes (i) internet advertising; (ii) provision of cloud services; (iii) provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet; (iv) providing data or information in electronic form through a computer network; (v) online supplies of digital content (movies, television shows, music and the like); (vi) digital data storage; and (vii) online gaming.13 As evident from this wide scope, clearly the regime has a wide span.

Even though the aforesaid wide scope of OIDAR applies to both resident and non-resident service providers, in the operating mechanics of OIDAR services a special dispensation exists for non-resident service providers which creates a carve-out basis differentiation of the service recipient. Broadly speaking, in the event the non-resident service provider provides a service to a registered business entity14 in India, then such entity is liable to discharge GST (on reverse charge basis)15 whereas, such non-resident provider is required to pay GST in India where the service recipients are unregistered individuals. In short, B2B OIDAR services are taxable in hands of resident service recipients, whereas the non-resident service provider is liable to discharge GST on B2C supplies made in India.

Amendment proposed in budget 2023

It is in the aforesaid background that the proposal made in the budget 2023 needs to be appreciated. As stated above, the scope of OIDAR is very wide. However, there are certain digital services which are excluded from its purview. This is because of the technical definition of OIDAR which permits only coverage of those services “the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services”.16 This exclusion has formed the basis of a view that certain transactions are not taxable even though provided online by non-resident service providers because the “human intervention” cannot be described as minimal in a given factual setting. For illustration, provision of live services online (as against by an automated system) is argued as not covered within the scope of OIDAR. Many disputes are currently pending on account of this technical construction of the OIDAR definition.

Addressing this aspect, the Finance Bill, 2023 has proposed to revisit the OIDAR definition to omit the phrase “essentially automated and involving minimal human intervention” therefrom.17 This proposal, if enacted by the Parliament, can imply that the qualitative criteria to exclude certain digital services from the scope of OIDAR would stand denuded and even those services by non-residents which have a significant human intervention would stand covered.

One may be tempted to say that the proposal hardly merits description as a substantive tax, given that it is just a tweak to an existing law. A finer inspection of the proposal would, however, reveal that this is not the case. For this purpose, certain aspects underlying the levy of OIDAR need to be appreciated. First and foremost, as described above, the span of OIDAR is very wide. It covers virtually every digital service. Thus, the omission of the qualitative criteria of human-centric digital services would significantly widen the scope of GST on digital services.

Second, as referred above, OIDAR is the sole repository of the law providing for levy of digital services provided by non-resident service providers to non-business entities in India. For B2B supplies, the GST paid by Indian recipients of OIDAR is available to them as credit and hence the impact of the proposal (on account of its enlargement) is likely to be revenue neutral. However, in case of B2C supplies by non-resident service providers, the 18% GST on OIDAR is bound to affect the economics of their supplies, besides significantly adding to the tax collections in India given the ever-increasing scope of digital service consumption by Indian residents. Given that this proposal is likely to mean that the span of OIDAR covers virtually all digital services provided by non-resident service providers to Indian consumers, the proposal is not a minor tweak, but a substantial expansion of the scope of tax on digital services in India.

The most crucial part of the proposal is the fact that it has emanated from the recommendations of the GST Council which is a constitutional authority entrusted with the responsibility to make recommendations on GST laws.18 In its 48th meeting, the GST Council had recommended “amendment in definition … so as to reduce interpretation issues and litigation on taxation of OIDAR services”.19 This aspect is further accentuated in the official memorandum explaining the budget proposal insofar as it states that the proposal would “remove the condition of rendering of the said supply being essentially automated and involving minimal human intervention”.20 Thus, the proposal is clearly intended to “reduce interpretation issues” inter alia by omission of the expression “minimal human intervention” which has been the cause of such interpretational issues and, thereby, expand the scope of tax. To put it in other words, the legislative intent is to omit the scope for interpretation and expand the tax base of OIDAR.

Future outlook of tax on digital services in India

The summation of the various movements in the space of tax on digital services and the budget 2023 proposal should not be looked in isolation as random steps. Instead, there is a larger design at play revealing an international consensus towards re-evolution of such taxes. Described as an “international collaboration to end tax avoidance”, in the previous decade Organisation for Economic Cooperation and Development (OECD) attempted to bring international tax community at large within an agreed set of “action points” to address what it described as “domestic tax base erosion and profit shifting (BEPS) due to multinational enterprises exploiting gaps and mismatches between different countries’ tax systems affects all countries”.21 “Action 1” of the BEPS discussions resulted into a concerted decision of the various tax administrations across the globe to address “tax challenges arising from digitalisation”.22 EQL, SEP, etc. can be dubbed to be developments inspired by Action 1. Thus, the taxes on digital services are a conscious step by India to expand the tax base in line with the international reflections on the subject.

Having said that, the scope of expansion is not exhausted with these levies. Besides the domestic law changes as described earlier, India has been actively advocating at the international forums the further expansion of taxes on digital services. It is a key participant in the OECD led discussion on “Pillar 1”, which is expected to introduce a “unified approach” of all nations globally to tax digital services.23 While the Pillar 1 proposals remain under discussion, India is also understood to support the development at the UN level wherein the United Nations Committee of Tax Experts adopted “Article 12-B” in its Model Double Tax Convention with an underlying intent to preserve “market country domestic law taxing rights on digital services, including online advertising services, supply of user data, online search engines, online intermediation platform services, social media platforms, digital content services, online gaming, cloud computing services, and standardised online teaching services”.24

Even on the indirect tax front, the discussions are at play at the WTO seeking to revisit the traditionally agreed practice of “not imposing customs duties on electronic transmissions”.25

Thus, significant action is evident even at the international play, the results of which can further add to the domestic law expansion of taxes on digital services.


The budget 2023 proposal, albeit in arena of indirect taxes, reaffirm the belief, arising from consistent legislative developments in this area, that India is pioneering the rework in taxation of digital services to enhance the scope of tax. Both in the direct and indirect tax spheres, significant rewrite of rules governing taxation of digital services has been evident and continues to be at play. With the imminent advent of global rules, it is very likely that this fiscal space continues to be a work in progress with expected further evolution and refinement of the applicable principles and the legislative provisions.

Advocate, Supreme Court of India; LLM (Taxation), London School of Economics)

1. Available at <https://www.indiabudget.gov.in/doc/budget_speech.docx>

2. Income Tax Act, 1961, S. 9(1)(vii).

3. Report of Committee on Taxation of E-Commerce, Proposal for Equalisation Levy on Specified Transactions (February 2016). Available at <https://incometaxindia.gov.in/news/report-of-committee-on-taxation-of-e-commerce-feb-2016.pdf>.

4. Levied under Finance Act, 2016, Ch. VIII.

5. Finance Act, 2016, S. 165.

6. Finance Act, 2016, S. 165-A(a),.

7. Finance Act, 2016, S. 165-A(3)(a).

8. Income Tax Act, 1961, Expln. 2-A to S. 9(1)(i).

9. Income Tax Rules, 1962, R. 11-UD.

10. Income Tax Act, 1961, S. 115-BBH.

11. Income Tax Act, 1961, S. 2(47-A). For details, see Tarun Jain, “India Proposes to Tax Crypto Assets: A Review”, available at <http://www.scconline.com/DocumentLink/j3o561my>.

12. Levied under provisions of Finance Act, 1994, Ch. V.

13. Integrated Goods and Services Tax Act, 2017, S. 2(17).

14. The technical expression used is persons other than “non-taxable online recipient”. In turn this expression is defined to mean “any government, local authority, governmental authority, an individual or any other person not registered and receiving online information and database access or retrieval services in relation to any purpose other than commerce, industry or any other business or profession, located in taxable territory”. Integrated Goods and Services Tax Act, 2017, S. 2(16).

15. Notification No. 10/2017-Integrated Tax (Rate) dated 28-6-2017 <http://www.scconline.com/DocumentLink/Y2x43s02>.

16. Integrated Goods and Services Tax Act, 2017, S. 2(17).

17. Finance Bill, 2023, S. 144(b).

18. Constitution of India, Art. 279-A.

19. See PIB release dated 17-12-2022, available at <https://www.pib.gov.in/PressReleasePage.aspx?PRID=1884399>.

20. Memorandum Explaining the Provisions in the Finance Bill, 2023, available at <https://www.indiabudget.gov.in/doc/memo.pdf>, p. 87.

21. For details, see <https://www.oecd.org/tax/beps/>. )

22. For details, see <https://www.oecd.org/tax/beps/beps-actions/action1/>.

23. For details of Pillar 1 proposal, see <https://www.oecd.org/tax/beps/oecd-invites-public-input-on-the-secretariat-proposal-for-a-unified-approach-under-pillar-one.htm>. For subsequent developments on Pillar 1, see <https://www.oecd.org/tax/beps/beps-actions/action1/>.

24. For details, see Tax Consequences of Digitalised Economy <https://www.un.org/development/desa/financing/what-we-do/ECOSOC/tax-committee/thematic-areas/tax-consequences-digitalized-economy>.

25. WTO Ministerial Declaration dated 22-6-2022. WT/MIN(22)/32, available at <https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/MIN22/32.pdf&Open=True>.

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