52nd GST Council likely to clarify taxation for co-location or data center services

The 52^nd GST Council is likely to clarify taxation woes for co-location services or data center services. According to sources, the council is likely to get in a breather for this sector as it is considering to allow co-location or data center facilities to discharge GST at 18% only if the center is providing a physical space to the overseas client and not giving data storage and maintenance services.

Notably, the 52nd meeting of the GST Council will be held on 7th October, 2023 at Vigyan Bhawan , New Delhi.

"The council is likely to clarify that in case data centers are providing services to overseas customers with respect to storing the data, managing the data then it will be treated as an export. But in case where data centers has a contract only for providing physical space on rent then GST to be applicable at 18%,” sources told CNBC-TV18.

The issue came to the fore considering that a lot of doubts were being shared by the industry. Several multi national leaders who are providing data center services to overseas clients from India had flagged to GST authorities to avoid wrongful payment of taxes. Many companies just rent a space to overseas clients for housing servers and other computing hardware but in many cases centers not just rent a space but also provide services such as hosting and maintaining the information technology (IT) back up.

Experts say that such a clarity was much warranted as payment of GST in this regard was becoming an issue and industry with this clarity can avoid getting into tax troubles.

"Over last few years, lot of investments have come in data centres.  Ideally, the data hosting related services should qualify as 'export' If provided to overseas customers.  However, doubts  were being raised on this issue as to whether there are 'immovable property' related services and taxed on the basis of location of data centre.  It would good if the GST council can clarify that these services would indeed qualify as 'exports' and taxed on the basis of location of service recipient.  That will also automatically mean that data centres should be entitled to input credit for all purchases on which GST is paid," said Pratik Jain, a Partner at Price Waterhouse Coopers (PwC).

Abhishek Jain, National Head & Partner, Indirect Taxes, KPMG said, "Some jurisdictional authorities were questioning the export status for such data centre services on the premise that these are performance based and not purely recipient based with place of supply being India. Clarity on the said issue with export status being allowed should help provide certainty and prevent unwarranted hassles for this emerging sector."

Saurabh Agarwal, Tax Partner, EY said that the taxation of data centers is a complex issue, and there is currently no certainty on how to tax them fairly. This lack of clarity can lead to disputes between taxpayers and the tax department in future. "One way to avoid these disputes would be to clearly define the place of supply for data center services. This is important because it determines which state ultimately gets the tax on such transaction."

He added, "It is recommended that where a data center entity provides a complete managed service with data hosted on servers located in different states and countries, the place of supply should be where the contractual service recipient is located. This means that the tax would be received by the state where the customer is located (ie consumption principle), even if the data is stored on servers in other states or countries. Also, this would ensure that exports remain zero rated. This approach would also help in promoting this sun rise sector and ensuring that Indian data centres are used by the world at large."

MS Mani, Partner, Deloitte India believes that co-location services are in the nature of hosting and IT infrastructure provisioning services as they represent a bundle of services in which the immovable property services is one of the ingredients. Hence, he said, "taxing them as mere immovable property services would not reflect the correct nature of the supply. In a few cases , there could be immovable property services provided as such for running a data centre, without any other services required to run a data centre; it’s only in such cases that they can be taxed as immovable property services."