Indian Startups with no revenues want Service Tax exemption on foreign IT services procured

January 16, 2017, New Delhi: LocalCircles, India’s leading citizen engagement platform has been working with its more than 1.2 million citizens and among them over 30,000 entrepreneurs and startups. This discussion assumes importance as India’s General Budget 2017 is just a few weeks away.

In the last one year, significant announcements have been made by the Government on making it easier to start-up companies in India. This includes benefits for Startups on various fronts including tax exemptions, exemption from inspections, IPR benefits, faster company registration, new fund for Startups and opening Government business opportunities for Startups. The objective of these initiatives is to create a better economic environment for startups. But recent moves by tax department may affect these incentives especially the recent service tax notification.

A major issue that is hitting many startup entrepreneurs in the last two weeks is that of the newly introduced service tax notification by Central Board of Excise and Customs Circular No. 202/12/2016-Service Tax – (09/11/2016) effective Dec 1, 2016 requiring payment of service tax on IT services procured from overseas. Per the notification, Indian companies procuring IT services from overseas suppliers classified as Foreign OIDAR (online information and database access retrieval) vendors now required to pay service tax on foreign vendor invoices in India, register themselves for service tax and deposit it on behalf of their foreign vendors.

For technology and consumer startups, most of such services procured are from foreign vendors as they are not available in India and this will not only increase the cost of doing business for Indian startups, it will also result in increased regulatory compliances as they will be on the receiving end of any scrutiny notices that are generated as a result of the filings.

It also will make India based startups less competitive in a global marketplace as many global tech startups that are headquartered and registered overseas do not have to face this tax liability. This move alone is reason enough for some India based tech and consumer startups to consider moving outside India. As hosting or cloud infrastructure is the biggest cost for most startups. Followed closely by digital marketing where again the payment has to be made to foreign service providers.

In a poll conducted in the Startup/SME online community, 62% startups, SMEs and citizens suggested that Startups with no revenues must be fully exempt from the Service Tax as they will not get any offset and the tax may further burden them in their seed stage where most startups operate on no or limited funding.