How GST Applies to AI Tools Under OIDAR Rules? 

Introduction

AI tools have become a normal part of how founders, developers, and teams work today. These tools run online and fall under a specific GST category called OIDAR. Every provider and user in India must understand how GST works for such online systems. This blog explains these rules with clarity and shares how Ebizfiling helps businesses stay compliant.

What is OIDAR and Why AI Tools Fall Under It?

OIDAR stands for Online Information and Database Access or Retrieval services. This category covers digital services that work only through the internet. AI tools fit this definition because they are delivered electronically, run on cloud infrastructure, and depend on automated systems.

Common examples include:

• AI chatbots

• Generative AI platforms

• AI powered SaaS

• API based AI models

• Cloud analytics

• Online automation systems

As per GST rules, if a service cannot be provided without technology, it generally comes under OIDAR.

How GST Determines the Tax on AI Tools?

GST follows a destination based approach, which means the tax depends on where the user is located and not where the company or its servers operate. When the user is in India, GST applies to the AI tool, and when the user is outside India, GST does not apply in India. The place of supply is identified through different indicators such as the user’s billing address, payment location, IP address, SIM card country, and bank details. These checks help tax authorities determine where the service is actually consumed, which is the core rule behind GST for digital and OIDAR based services.

 GST Rules Based on Supplier and Customer Type   

Indian Supplier to Indian Customer: When an Indian company provides AI tools to an Indian user, GST at 18 percent applies on the service, and the supplier is responsible for collecting this tax, reporting it, and paying it through regular GST returns. This is the simplest and most common scenario for domestic SaaS and AI platforms.

Foreign Supplier to Indian Business (B2B): When an Indian business purchases an AI tool from a foreign supplier, the tax is handled through the Reverse Charge Mechanism, which means the Indian recipient must pay IGST directly to the government. The business can then claim input tax credit on this amount, which keeps the transaction tax neutral while ensuring that GST obligations are met properly.

Foreign Supplier to Indian Consumer (B2C): When a foreign AI tool provider sells directly to an Indian consumer who is not registered under GST, the foreign company must register for GST in India, charge 18 percent IGST on the subscription or service, and file GSTR 5A every month. This rule removes the pricing gap between foreign and Indian SaaS providers and ensures fair tax treatment across the digital economy.

 Compliance Requirements for Foreign AI Tool Providers   

If a foreign company sells AI tools to people in India, they must follow these rules:

• Register in India using Form GST REG 10.

• File monthly returns in GSTR 5A.

• Pay IGST on all B2C digital supplies.

• Appoint an Indian representative when needed.

Non compliance may lead to tax recovery, notices, or restrictions on payment settlements.

GST Rate for AI Tools Under OIDAR 

GST follows a destination based approach, which means the tax depends on where the user is located and not where the company or its servers operate. When the user is in India, GST applies to the AI tool, and when the user is outside India, GST does not apply in India. The place of supply is identified through different indicators such as the user’s billing address, payment location, IP address, SIM card country, and bank details. These checks help tax authorities determine where the service is actually consumed, which is the core rule behind GST for digital and OIDAR based services.

Are AI Tools Always Treated as OIDAR?

Almost all online AI tools qualify as OIDAR because they are fully technology driven. A few exceptions apply when:

• A service depends heavily on human advice.

• A provider delivers a hybrid consultancy model.

• The output is customized through human intervention.

In such cases, GST classification may shift from OIDAR to a general service category.

How Ebizfiling Works?    

• We at Ebizfiling assess whether your AI tool falls under OIDAR based on GST law.

• We help you register under the correct category through REG 10.

• We guide you in monthly GSTR 5A or standard GST returns.

• We set up proper invoicing for digital service supplies.

• We monitor compliance deadlines and keep your filings on time

Conclusion   

AI tools will only expand in India, and OIDAR makes GST compliance predictable for digital businesses. Every provider must understand how GST applies to AI tools to avoid penalties and maintain smooth operations. Ebizfiling supports businesses at every stage of their GST journey, including registration and ongoing filings.

Suggested Read :

Balancing OIDAR GST Compliance with Digital Privacy Laws

OIDAR Compliance Roadmap for Foreign Startups 

Indian Buyers Trigger Reverse GST on OIDAR Services

Why User Location Matters for OIDAR India?

Do Digital Nomads Abroad Trigger OIDAR for India?

Frequently Asked Questions on AI Tools and OIDAR GST