MoF: Whitepaper on Export related challenges being faced by “Data Hosting Service Providers” under GST

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MoF: Whitepaper on Export related challenges being faced by “Data Hosting Service Providers” under GST

Tejasvi

@tejasvi

June 11, 2024

Public Policy

Background

In today’s information era, resource sharing is imperative to keep up with dynamic and radical growth of technology. The concept of owning and maintaining Information Technology (IT) infrastructure for data storage and processing is not efficient. This has led to the emergence of ‘cloud computing’ services.

Cloud computing services refer to delivery of computing resources, such as software, storage, processing power, and databases, over the internet (the cloud) rather than hosting and running these resources locally on individual devices or on-premises servers. Cloud computing services cover services such as data storage, computing, analytics, machine learning, artificial intelligence and other software services available through the internet. It provides the ability to access IT resources on demand, without the need for significant capital expenditure. This results in reducing entry barriers for new entrants in multiple sectors and at the same time, provides scalability and security. Cloud computing has thus become a platform for innovation.

Data centers serve as the backbone of cloud computing services as they comprise of the necessary hardware for storage and processing of data. In this increasingly digital world, Ministry of Electronics and Information Technology (MeitY) has consistently focused on the need to create data center infrastructure within India to support data localisation and protection of digital sovereignty of the country with a vision to make India a Global Data Centre hub. Accordingly, this burgeoning sector has enormous potential for attracting foreign direct investments, generating employment and earning foreign exchange by remotely supplying data hosting services to the world.

Issue

As per GST law, data hosting services provided by Indian entities to overseas entities qualify to be export of services and are zero rated under S. 16 of IGST Act read with S.13(2) of IGST Act, since receiver of such services and the Place of Supply (PoS) is outside India.

However, recently, ground level officers in few States have started taking a view that such services do not qualify as export of services, based on the following grounds:

Classification as “Intermediary services” - The GST Council’s well drafted Intermediary Circular of September 2021 clarified doubts on the scope of ‘intermediary services’. However, the benefit of said clarification is yet to be fully extended in substance to data hosting service providers with exports still being continuously questioned/ disputed, resulting in overall uncertainty, prolonged litigation; and delay in refund resulting in working capital blockage.
Immovable property-based services - There also persist disputes on determining the PoS in respect of Services rendered by the data centres i.e., whether the services get covered under S. 13(2) or S. 13(4) of IGST Act, as per which the place of supply is to be determined as per the location of the immovable property. It is clear that the services do not qualify to be “immovable property services”.
Performance based services - There are disputes where the PoS in respect of the services rendered get covered under Section 13(3)(a) of IGST Act, 2017 as per which the place of supply is determined to be the location where the supply is actually performed alleging that there are goods being made physically available by the recipient of service. It is clear that in respect of data centers there are no goods being “made available” by the recipient of services.

Denial of export status on supply of data hosting services under GST is leading to an unwarranted litigation with the GST authorities. This continued tax uncertainty on realisation of amount blocked, due to refund claims denied by the GST authorities, can create a huge financial strain on the consistently growing investments in this sunrise sector.

In this regard, we have submitted a whitepaper to GST officials outlining the background of operations of such companies (along with a flowchart), the growth of the sector and the challenges being faced under GST laws in India. We have requested the government to clarify that data hosting services are not “intermediary services” and qualify as export of services.

The same is attached for your reference. Please write to tejasvi@nasscom.in in case you have any questions.

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Tejasvi