The announcement of the Central Board of Excise and Customs (CBEC)
including "Online Information and Database Retrieval" is a surprising move
and a cause of serious concern to the Internet based business activity.
A copy of the detailed notification in this regard is given below.
The salient features of the notification are:
1. ISP charges are taxable under the provision.
2. Websites who charge the customer for certain specific information
contained in their web site either in advance or credit basis are
liable to pay service tax.
3. It is clarified that in e-commerce transactions will not ordinarily
be covered under the service tax net. unless the web sites charge
the surfers for information on sale of goods or services offered by them.
4. Interconnection charges paid by one ISP to another ISP are not liable
to service tax.
5. Cyber cafés are not liable to pay service tax.
A close scrutiny of the circular indicates that the department has a
fixation on the use of "Database" and its use on payment. It must be remembered
that today every web site is hosted on a database concept and web pages
are delivered from out of such databases. Hence any web site charging for
its services can be brought under the tax net under the discretion of the
Since the department has used the definition of "Data" as given in the
Information Technology Act -2000, which is "all inclusive", no content
can escape its inclusion in the definition. The clarifications attempted
indicate that the department wants to restrict the incidence of the tax
to certain activities where information in an archive is made available
for a fee. This is not however reflective in the all inclusive definition.
Confusion is also evident in the labored clarification given to exempt
Cyber Cafe's from the ambit of the tax while keeping the ISP s within it.
If Cyber cafe's are only providing infrastructure for internet connection,
so also are the ISP s through their modems, V-Sats, Routers etc.
It is clear that the department is under an impression that this would
be a great source of income in view of the E-Commerce projections normally
dished out by industry agencies. But insiders know that their is a gestation
period for the projections to be achieved and any premature taxation could
What is also important is that the interpretations given by the tax
authorities can provide legal implications in some cases. For example,
the taxation of Content can be interpreted to mean that either "Speech
Can be taxed in India" or "Content is not Speech". Similarly the distinction
between ISP s and Cyber Cafe's can be interpreted to mean that the two
are legally different and the exemption provided under Section 79 of the
Information Technology Act to ISP s is not applicable to Cyber cafe's.
Besides such unfortunate consequences, the present measure is a big
blow to the E-Learning industry and needs to be reconsidered in the interest
of "Knowledge Creation and Propagation"
July 21, 2001
Tax on 15 New Services to be effective from 16.7.2001- Instructions
Following is the text of the notification issued by Central Board of
Excise and Customs regarding addition of Online Information Services under
the Service Tax ambit:
On-line information and database access and/or retrieval:
1. As per section 65(19), 1994, the term "On-line
information and data base access or retrieval" means providing data or
information, retrievable or otherwise, to a customer in electronic form
through a computer network. The words "Data", "information", "electronic
form" and "computer network" have the same meanings assigned to them in
the Information Technology Act, 2000. As per section 65(72)(zh), taxable
service means any service provided to a customer, by a commercial concern,
in relation to on-line information and database access or retrieval or
both in electronic form.
2. The definitions given in the Information Technology
Act, 2000 are as follows:-
"Data" means a representation
of information, knowledge, facts, concepts or instructions which are being
prepared or have been prepared in a formalised manner, and is intended
to be processed, is being processed or has been processed in a computer
system or computer network, and may be in any form (including computer
printouts, magnetic or optical storage media, punched cards, punched tapes)
or stored internally in the memory of a computer.
"Information" includes data,
text, images, sound voice, codes, computer programmes, software and data
bases or micro film or computer generated micro fiche.
"Electronic form" with reference
to information means any information generated, sent, received or stored
in media, magnetic, optical computer memory, microfilm, computer generated
microfiche or similar device.
"Computer network" means
the interconnection of one or more computers through-
the use of satellite, microwave, terrestrial line or other communication
terminals or a complex consisting of two or more interconnected computers
whether or nor the interconnection is continuously maintained.
3. In the context of this service, it may be relevant
to point out the manner in which on-line information and database access/retrieval
is generally made available. First, the function of what is commonly known
as Internet Service Providers (ISPs). The ISPs provide telecommunication
network or gateways necessary to access messages and databases and other
information holdings of content providers. The second element is on-line
information provision services which includes database services, provision
of information on web-sites, provision of on-line data retrieval services
from data bases and other information, to all or limited number of users
and provision of on-line information by content providers.
4. Internet service providers (ISPs) provide access
to the web-sites through the computer network and the web-sites. Web-sites,
in turn, provide the database or information. Some of the well-known ISPs
operating in India are VSNL, MTNL, Satyam online, Bharti, Tata, RPG, HCL,
Wipro, BPL, Mantra online, Dishnet. They normally charge the customers
on the basis of usage of time (hours). They also provide dedicated lease
lines on lump-sump payment basis. Clearly ISPs provide service in relation
to on-line information and database access or retrieval. They are an integral
part of the internet operations and without their service, the data or
information can neither be accessed nor retrieved. They are, therefore,
to pay service tax on the amount charged from the customers whether on
usage time basis or on lease line basis.
5. As regards paid web-sites, a few examples
of Indian dot companies are, Indiainformer.com, CIIonline.com, who charge
the customer for certain specific information contained in their website
either in advance or credit basis. They shall be also liable to pay
service tax on the paid services provided by them. It is obvious that
where the information is supplied free of charge, no service tax is payable.
6. Point for clarification:
A question has been raised as to whether e-commerce transactions (other
than providing online information and data) are covered in the ambit of
service tax. It is clarified that in e-commerce transactions, no service
of online information and database access/retrieval is involved. Therefore,
e-commerce transactions will not ordinarily be covered under the service
tax net. Normally, the web sites do not charge the surfers for information
on sale of goods or services offered by them. If at all they do, service
tax will be payable on the amount charged for providing the information.
Another point raised relates to applicability of service tax on inter-connectivity
services provided by one ISP to another and the charges recovered for such
services. It is understood that this is done to inter connect various networks
so as to reach the server where the information is stored. It is informed
that interconnection of one ISP to another is a commercial and technical
arrangement under which service providers connect their equipment, networks
and services to enable their customers to have access to the data or information.
Through this arrangement, it is the customer of an ISP who ultimately receives
on-line information and database access and/or retrieval service. Service
tax on the amount charged from him is payable. Therefore, interconnection
charges paid by one ISP to another ISP are not liable to service tax.
A question has also been raised whether the cyber cafés will
be subject to service tax. It is clarified that the Cyber cafés
provide only the infrastructure such as computer terminals and internet
connection. It is the ISP or web-sites who provide on-line access or retrieval
of information, Therefore, cyber cafés are not liable to pay
service tax. Services provided by ISP to cyber café are taxable
and the ISP will pay the tax on charges realised from the cyber café.
Comments and Suggestions can be sent