Introduction
Trade and commerce are the building blocks of a nation. The growth of an economy can easily be gauged by the readiness and availability of services and the clarity with which the service provider is rendering it. Recently, the GST Policy Wing of the Central Board of Indirect Taxes and Customs (‘CBIC’) issued clarifications on the place of supply of data hosting services provided by service providers located in India to cloud computing service providers located outside India. The circular[i] has significantly helped data hosting businesses identify the place of supply of their services and comply with the applicable Goods and Services Tax (‘GST’) law and rules.
The Problem
Data hosting businesses in India have raised two primary concerns: first, whether data hosting services provided by Indian companies to foreign cloud computing providers would qualify as exports, and second, whether such services could qualify as ‘intermediary services’ under the Integrated Goods and Services Tax Act, 2017 (‘Act’).
The Solution
A clarification was subsequently issued by the GST department wherein the following was observed: Â
1. Clarification Regarding Intermediary Status of Data Hosting Service Providers
The department clarified that data hosting service providers do not qualify as intermediaries as they supply services on a principal-to-principal basis, i.e., directly to the cloud computing provider, and have no interaction with the end user of the cloud services.
The department explained how cloud computing services work and provided a step-by-step procedure for understanding their functioning and why they do not qualify as ‘intermediaries’ under s. 2(13) of the Act.
Cloud computing service provider enters into a contract with the data hosting to use their data centre.
The data hosting service provider either owns or leases the infrastructure and premises, including all the fixed and variable costs associated with rendering the service.
Further, Â the data hosting service provider has no access to the information of the end users/consumers as the cloud computing service provider uses applications or software to provide services to the end users/consumers.
Considering there is no contact between the data hosting service provider and the end users, the relationship between the data hosting service and cloud computing service provider is on a principal-to-principal basis on his own account, and the service provider is not acting as a broker or agent, the same does not qualify as an ‘intermediary services’ under the Act. Consequentially,  the place of supply of such services shall not be determined in accordance with s. 13(8)(b) of the Act.
2. Whether Data hosting services are related to goods ‘made available’ by the recipient
The second clarification addresses whether data hosting services are related to goods ‘made available’ by the recipient under s. 13(3)(a) of the Act. It is clarified that in the instant scenario, data hosting service providers utilize the infrastructure and essential services they own. They independently handle, operate, monitor, and maintain them. Thus, overseas cloud computing service providers cannot be considered to own or make available any infrastructure.
Therefore, the data hosting services cannot be deemed related to available goods, and the place of supply cannot be determined under s. 13(3)(a) of the Act, even if the recipient makes some hardware available.
3. Are data hosting services related to immovable property?
The third clarification is that data hosting services are not a passive supply of services directly related to immovable property. Instead, data hosting service providers offer a comprehensive range of services necessary for cloud computing to function for its users. Therefore, data hosting services are not directly linked to immovable property, and the place of supply for these services cannot be determined under Section 13(4) of the Act.
Conclusion
The department's clarification was much needed, especially in the present economy, which is almost entirely run on data, most of which is available (and managed) online. With India’s data hosting sector booming, any ambiguity regarding its taxability must be cleared promptly to avoid monetary and penal repercussions.
Considering that determining the place of supply was a looming issue for the data hosting industry in India, the clarification issued by the GST department comes in handy. Using the elimination method, It has now been clarified that the place of supply is determined as per the default provision of s. 13(2) of the Act, i.e., the place of supply is where the recipient is located. As the data hosting services are being provided to overseas cloud computing providers, it will be treated as an export of services, subject to fulfilment of the conditions mentioned in s. 2(6) of the Act.
The circular's clarification has cast away the confusion regarding the status of the place of supply in the instant scenario and made it easier to tax the services.
End Note
[i]Â Circular No. 232/26/2024-GST dated 10.09.2024.
Authored by Arjun Singh Tamang, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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