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.
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.
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.
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.
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 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.
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.
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
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.
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Most AI tools fall under OIDAR because they are delivered online and depend fully on automation. If the tool works without any physical delivery or offline method, it generally qualifies under this category.
AI based SaaS tools attract 18 percent GST. This is the standard rate for digital services unless notified otherwise by the GST Council.
A foreign provider must register if they have even one non business customer in India. This rule applies even if they have no office or employees in India.
In B2B transactions, the Indian business pays GST under reverse charge. The business can later claim input tax credit.
Foreign suppliers must file GSTR 5A every month. This return records all OIDAR transactions supplied to Indian users.
No. GST looks at where the user is located, not where the server or company headquarters operate.
Yes. API based services qualify because they are fully digital and accessed through the internet.
They may face recovery actions, tax notices, and blocked payments. Non compliance can cause long term complications.
If human involvement forms a major part of the service, the classification may change. A detailed review is required for such hybrid models.
OIDAR removes unfair pricing gaps between foreign and Indian AI providers. It ensures both operate under similar tax rules.
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