India GST Compliance for Digital Businesses | Key Challenges & Recent Changes

Conducting a tax reform, replacing one tax system with another, or implementing a new type of tax into the national regulatory framework can be an immense challenge and daunting undertaking for governments. 

Recent examples include the Philippines, where it took years for VAT on digital services legislation to be adopted and implemented, and Brazil, where the government announced in 2023 a plan to replace the existing indirect tax system with a new one by 2026.

The introduction of GST in 2017 marks one of India's most significant tax reforms. Considering the size of its economy and market, it is safe to say that that was one of the most impactful transformations of the tax system globally. However, with new rules come new requirements and challenges for taxable persons. 

Historical Background to GST Implementation

Implementing the GST regime in India was part of the “One National, One Tax” program, which aimed to create a single market and replace 17 existing state and local taxes with one country-wide tax. The road to implementing a uniform indirect tax system lasted 15 years and faced many difficulties and obstacles before it was completed in 2017. A more formal approach was introduced in 2011 when the government formed a Committee to prepare the GST legislation.

With the establishment of the GST regime, a previously fragmented and complex tax system with different rates and rules applied to similar sales of goods was replaced with a regime that uses four taxation rates. Since 2017, the Indian government has continued to work on improving the GST regime and addressing issues related to the supply of digital goods and services, especially cross-border transactions.

In 2018, the e-way bill was introduced as part of the continuous effort to improve the GST regime. In 2019, the composition scheme for services was introduced, and in 2021, the government started implementing the e-invoicing system.

However, although the GST Council, established by the GST Act to supervise the application of GST rules and consider and resolve all GST-related matters, is constantly working to remove shortcomings and contradictions in the system, digital businesses still face compliance challenges.

Key Compliance Challenges for Digital Businesses

Since the GST regime in India is still developing and subject to change due to a lack of rules in certain areas, such as virtual digital assets and online gaming, businesses operating in these sectors may face specific issues, such as which GST rate to apply and when GST is due.

In addition, from 2017 to 2024, GST disputes were settled before the High Courts and Supreme Court, which led to contradictory interpretations of GST rules. In addition to this, there are a lot of so-called Advance Rulings that add to the inconsistency in case law. One such ruling is the one relating to the Uber case, where Karnataka’s Authority for Advance Ruling determined that Uber, as an e-commerce operator under the GST Act, must collect and pay GST on the services provided by the drivers using the Uber app, even though the company does not collect ride fees.

In addition to resulting in financial and administrative burdens, the inconsistency in case law makes it difficult for digital businesses to understand which GST rules apply to them.

Furthermore, foreign digital services providers must register for GST and apply an 18% rate when they first supply digital services, commonly known as Online Information Database Access and Retrieval or OIDAR services, to Indian consumers. Additionally, foreign businesses without a physical presence in India must appoint a tax representative to ensure compliance with India's GST rules and regulations.

Finally, e-invoicing rules state that once taxable persons exceed an INR 50 million threshold (around USD 575,500), they must issue and receive B2B and B2G e-invoices. This further complicates digital businesses' compliance with national GST rules.

Recent Changes and Future Developments

In 2024, the GST Council approved the establishment of GST Appellate Tribunals, which would settle GST-related matters and issues. Thus, they would further contribute to harmonizing the regime in India. 

Additionally, at the "The Future of GST: Navigating Key Issues and Charting the Way Forward," held last year, key stakeholders discussed the evolution of India's GST regime and needed adjustments and changes. The stakeholders agreed that introducing GST 2.0 is a logical step in the development process, which should focus on further simplifying compliance, enhancing efficiency, and improving transparency. 

Other measures presented include broadening the tax base and focusing on the digital transformation of government administration. The participants noted that small businesses often face the most significant compliance issues. Therefore, the next phase of GST reform should include better training and a digital support system to help SMEs navigate tax requirements more efficiently.

Conclusion

To remain compliant with GST rules, digital businesses that operate in India and provide services to Indian users and consumers should monitor for any changes to GST legislation and pay attention to proposals and decisions published by the GST Council. Furthermore, digital businesses should regularly train key in-house stakeholders to ensure they are well-versed in GST compliance requirements and procedures.

Additionally, with the establishment of the GST Appellate Tribunals, the case law on GST matters will enter a new phase, which could ultimately lead to new interpretations and rules being imposed. Therefore, digital businesses can consult with tax professionals or advisors to stay current on any changes to the GST regime and ensure they meet all the GST requirements.

Source: Grant Thornton, EY, World Bank, BDO, VATabout