If you own or operate a SaaS business, chances are you already know the intricacies of charging and paying for taxes across the globe. Unlike the business environment of old, your consumer segment can feasibly be comprised of more than one country. For some SaaS companies, they sell their services anywhere there’s Internet access.
But for many developing countries and emerging economies, the definition – and therefore the way in which they recognize a SaaS company – is different. In India, for example, the Central Government have made it difficult for SaaS companies due to the fact that there is low acceptability of the online model, low-quality Internet penetration, and an unsupportive policy framework.
This environment has caused many Indian SaaS companies to leave the country for headquarters elsewhere. However, if you sell your service within the country borders of India, you have no choice but to comply with its shaky policies on SaaS companies.
The most important policy to understand is India’s service tax. India considers all SaaS products a service and sometimes even a good, too. Requirements for, and compliance with, the Indian service tax is complicated. To help, we’ve outlined the basics of the tax and the thresholds that require you to pay it.
The History of India’s Service Tax
India’s service tax is a tax levied by the Central Government of India on services provided, excluding services covered under “negative list” and considered the Place and Provisions of Services Rules.
The introduction of the tax was pioneered by Dr. Raja Chelliah in 1993 at a nominal rate of 5 percent of sales. At the time of introduction, there were a total of two services that fell under the service tax, and a total of 2,500 companies were taxed.
Fast forward to today, and India’s service tax now hovers around 14 to 15 percent, covers more than 119 different services, and had close to two million companies taxed in the most recent year reported.
India’s Online Service Tax for SaaS Businesses
As one can see, the exponential widening of India’s service tax has caused many services to be taxed that were not included in the original tax policy. For SaaS companies, India now considers the products sold within its borders as a service, and therefore requires that service taxes be paid.
Unfortunately for SaaS companies, India’s convoluted definition of a SaaS product has caused many SaaS businesses to be considered a service AND a product. Microsoft’s Office 365, for example, has at some times been charged as a service and other times as a product and service, depending on the tax policy at the time. Microsoft was required to pay India’s online service tax plus a VAT tax in those situations.
However, this article is focused on the service tax only, and we’ll discuss the SaaS requirements in a moment. Just make sure that you’re also aware of India’s changing policies and the fact that the Central Government might at one point consider your company a product and a service.
Currently, the Indian government defines a digital product as:
- Pre-packaged on media or paper license or PUK
- Pre-packaged embedded software with hardware
And it defines a digital service as:
- Bespoke / customized software development
- Everything else not covered in the previous three bullet points
Since SaaS is not explicitly covered as either a product or a service, it’s considered a service by the Central Government of India under bullet point number four.
Since a SaaS product is now considered a service, all SaaS sales in India are subject to its online service tax. It’s up to your SaaS business to account for and pay this tax.
For transactions that occurred on or after June 1st, 2016, India’s online service tax is 15 percent of the total transaction amount. Further, the Indian government has proposed to add a cess at 0.5 percent for all services sold within the country’s borders, bringing the potential service tax to 15.5 percent.
If you sell a SaaS product in India, you’re currently required to pay 15 percent in taxes for all sales unless you meet specific exemption requirements.
Exceptions to India’s Online Service Tax
India offers a small-scale exemption for SaaS companies doing business in India. If your company makes less than 1.2 million rupees (USD $15,000), you’re not required to pay the online service tax.
Further, you might not be subject to India’s online service tax if your service is listed on the government’s “negative list.” In previous years, the government levied service taxes only on services that were part of a positive list. Now, all services are subject to service taxes unless explicitly listed by the Indian government.
If your business is not on the negative list and if you expect to sell more than USD $15,000 in India, you need to register for the service tax within 30 days of doing business within the country’s borders.
Even though India’s documentation on what constitutes a SaaS company is more vague than in other nations, the country is making strides to shore up its definition.
As of today, service taxes are considered to be levied on all services defined in tax code 65B(44). This section of the finance act defines the term “service” to mean any activity carried out by a person for another consideration. Further, clause D of section 66E of the Finance Act includes information technology (IT) as a declared service.
These declared services include any IT services that design, program, customize, adapt, upgrade, enhance, or implement instructions, data, sound or images.
Given that the definition of an IT service is so broad, and that the Indian government seems to still be wrestling with the taxes it levies on SaaS businesses, it’s safer if you comply with India’s service tax from the onset.
This way, you ensure that your business is compliant with all international tax laws and gives you peace of mind.
To help alleviate your worries, don’t forget to download our guide on taxes in India!