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Tax notices recently received by a few US universities from Indian tax authorities may indicate that India is preparing to enforce compliance with its goods and services tax (GST) and equalization levy (EL) on payments that US universities and education technology companies receive from Indian students, candidates or consumers for online courses, where the attendees are in India, per the Indian GST rules.

This Alert summarizes Indian law on the GST and EL and explains how they might apply to certain payments received by US universities and education technology companies. It also outlines recent actions taken by Indian tax authorities and suggests actions for US universities and education technology companies to consider taking.

Background

Goods and services tax

India generally imposes an 18% GST on payments that foreign service providers receive for services furnished to Indian residents, regardless of whether the service provider has a taxable presence or physical nexus in India. For the GST to apply, all of the following conditions must be met:

• The service delivery is mediated by technology
• The nature of the service renders its supply essentially automated
• The service involves minimal human intervention
• The service cannot be delivered in the absence of technology

These affected services, known as Online Information Database Access and Retrieval (OIDAR) services, include electronic services (providing e-books, videos, movies, software, etc.), online supplies of digital content (movies, music, etc.), and online courses, among others.

Indian law requires foreign service providers to register and pay GST in India and comply with other GST requirements if they perform OIDAR services for Indian residents who are not registered for GST purposes in India (i.e., business-to-consumer transactions) and use services for other than commercial purpose. This may pose significant tax and compliance obligations on certain foreign service providers that do not have a presence in India.

Equalization levy

India imposes a 2% EL on revenue that certain foreign entities generate from e-commerce supplies or services provided to Indian consumers. The term "e-commerce supply or service" is broadly defined to include any online sale of goods or services.

The EL does not apply to foreign entities with a permanent establishment in India, or to royalties or technical service fees. It also does not apply to annual revenue at or below approximately US$265,000. The EL could apply to revenue earned from business-to-consumer transactions, as well as transactions between businesses. Like the GST, EL registration, payment and compliance obligations apply to the foreign entity.

Significance for US universities and education technology companies

With the advent of COVID-19, many Indian students could not return to their universities in the United States and attended class online from India. Similarly, candidates or consumers located in India took online courses from US universities and education technology companies. Under Indian law, GST or EL or both could apply to payments for these courses, regardless of whether the US university or education technology company has a taxable presence or physical nexus in India.

Recent enforcement by Indian tax authorities

According to publicly available information, Indian tax authorities recently took steps suggesting they might start enforcing GST and EL compliance. These steps include:

• Establishing a dedicated team of tax officers to focus on OIDAR services
• Identifying overseas organizations that could owe OIDAR GST
• Requesting confirmation of GST compliance from foreign organizations
• Setting up a data exchange system to cross-reference information reported for Indian GST and income tax purposes

Based on our observations, Indian tax authorities have sent tax notices to some US universities and education technology companies. In some instances, the tax authorities tried to contact the Indian representatives of organizations that did not respond by the stated deadlines.

Separately, an Indian Appellate Advance Ruling authority recently ruled that a taxpayer owed GST because its services qualified as OIDAR, even though providing them required some human intervention. This ruling could increase tax scrutiny and audits from the Indian tax authorities on OIDAR issues.

Possible action items

US universities and educational institutions should review their international operations to determine if they receive revenue from Indian students, candidates or customers. This includes situations in which students are in India due to temporary COVID-19-related travel restrictions. Institutions that receive revenue from India may need to evaluate if the GST or EL or both apply to that revenue, or if an exemption may apply.

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