Blog Article

SaaS is Software as a Service. It is a key part of cloud computing. Other aspects of cloud computing are desktop as a service, infrastructure as a service, mobile backend as a service and platform as a service. Software is licensed by a company on a subscription based model or a one-time payment model. The software is delivered electronically and directly to the consumer, which is the company or an individual as the case may be. The legal requirements of a SaaS business model come under scrutiny in this article.

SaaS is used by enterprise software companies and is applicable to Customer Relationship Management (CRM) programs, Enterprise Resource Planning (ERP), Human Resource Management (HRM), Computer-aided Designs (CAD), Management Information Systems (MIS), Database Management Software (DBMS), content management, antivirus softwares, gamification, hiring, payroll management, accounting software, etc.

India has a few glitches when it comes to SaaS related businesses and businesses in general, that leads the companies to relocate outside India or to purchase a foreign subsidiary. Cyber crime related offences and fraud seem to be two hindrances that did plague the online system of SaaS payments and taxes. With better strategies being constantly implemented, here’s a breakdown of the legal requirements for a SaaS based business.

Goods Or Services

Different countries have separate criteria for judging if a software is a good or a service making it complicated to calculate the different taxes for different countries based on that country’s existing definition of software as a service. A SaaS business is taxed in India subject to whether it sells goods or services, and the government’s definition of said goods and services. An Saas software is treated as a good if the software has a tariff code and has been pre-packaged, paper-licensed or PUK for sale. A Saas software is treated as a service if the service is customizable or if it does not fall within the category of being a good. This looks likely to change when a uniform Goods and Service Tax (GST) Bill is implemented and the tax rates along with the definition will be changed to make the process uniform.

Service Tax For Sales Within Vs Outside India

If a SaaS company is set up in India, and decides to sell within Indian territory, then the business will be required to pay a 15% service tax (inclusive of educational cess, higher educational cess and Krishi Kalyan cess). If the business is selling to customers outside India and accepts payments in foreign currency, then the business is exempted from paying service tax. A Business set up in India can also use a foreign payment gateway to collect payments, but those payments will be subject to currency conversion charges. Service Tax is paid by the 6th of every month if made electronically or by the 5th of every month if payment is done otherwise. Service tax is not applicable if goods and services are sold to the United Nations or international organisations, from SEZ, by international exporters, etc.

Subscription Or One-Time Model

All SaaS based businesses are either subscription based or the payment is made in one go for the duration of the service. But in India, there is no payment gateway that permits a subscription based model. Hiring an international payment gateway for their services would allow payments to be made on a subscription basis. The tax liability is more when using an international service as compared to a local service. One time payments are subject to the tax deductions at the prevailing rate. If the tax is not paid on time, it will attract a fine/penalty, with each penalty going up to INR 5000.

Turnover

If a SaaS business has a turnover of over INR 10,00,000 in a fiscal year, then that business is subject to service tax and sales tax regulation. A profitable SaaS business should be able to generate revenue of at least 6 crores a year in order for the business to sustain in the long-run. Though most businesses wouldn’t reach that target, it is important to note here that the Government can increase the upper limit for turnover to be subject to tax regulation. Half-yearly returns are required to be published every 6 months, by the 25th of the last month in that period.

State And Inter-State Laws

Different regions have different rates and taxes within a country. This leads to different laws as to whether to charge tax based on the location of the server or the location of the transaction. Multiple users from different states may be subject to separate state and regional taxes. Generally, states where electronic goods are exempted from tax, Saas is also not taxable.

Registration Of Saas Business

A SaaS business needs to be registered to pay service tax in India if it receives an annual turnover of over INR 10,00,000. This is the same for all businesses in India. A proper identification proof of the founders are required to register the business apart from filing the registration fee. Most companies tend to register outside India such as USA, Singapore or Canada. This is because compliance and ease of starting a business in those countries are more favourable to SaaS based businesses as compared to the procedures in India. Though the Government of India has taken several steps towards making setting and running a business easier, there are still some loopholes that need to be closed, especially in the technological services sector.

B2B And B2C

In India, Saas businesses are required to pay tax if they deal with business to business transactions. Both the parties can negotiate as to who will absorb tax, but in almost most cases, it is the buyer that absorbs the tax liability.

In Business to consumer transactions, taxes can be passed on to the end-customer unconditionally. The taxation laws for Business to consumer still has to be considered for tax because the tax is directly charged to the customer as the customer is the buyer again and the incidence of tax has to be borne by the buyer.

Shops And Establishment Act

Registration of all establishments is compulsory in India. The purpose of this Act is to regulate employment and work in commercial establishments and shops in Karnataka. This applies to all SaaS based companies that have a physical place of conducting business and these businesses need to register under the Shops And Establishment Act, 1963. There are different brackets based on the number of employees employed by a SaaS based company from under 10 employees to over 200 employees.These licenses need to be renewed every 5 years.

Entrepreneurship Memorandum

An entrepreneurship memorandum is required to be filed with the District Industries Center (DIC) for setting up small, medium or micro enterprise. A SaaS startup or business would be required to have an entrepreneurship memorandum under section 8 of the Micro, Small and Medium Enterprise Development (MSMED) Act, 2006. The memorandum of association, articles of association and other important company documents required the filing of the entrepreneurship memorandum which is maintained in hard copy form as well as records online on the government website.

Recurring Billing For Online Payments: Two Factor Authentication

Several instances in the past have shown us that SaaS businesses continue to provide services and charge payments to the client, even if the client has cancelled the services. This was because the companies had access to client information to charge payments. Thus, the government has made payment for SaaS services to be done by direct debit or direct credit with a two-step authentication process. This has been done by the government to curb fraud, cyber crime and reduce illegal transactions. Though some companies in the hotel industry and big players in their own space (Flipkart got PCI-DSS certification in 2012 and can collect recurring payments) do not require the authentication process for previous customers. Payments made vary as per the usage in each case.