Digital Tax trends in Indian Economy with comparative analysis of other nations
After waking up to the realization that India was
losing out on income from digital businesses which were paying significant
taxes outside, the Indian Government introduced an equalization levy, also
known as the “Google tax” on the amount paid to internet companies by
advertising agencies.[1]
The present international tax laws have become a thing of the past and they are
not in resonance with the ever changing digital transactions. Absence of solid
laws taxing the digital economy has become a boon to the companies which are
using the expertise of multinational tax and finance firms for purposes of tax
avoidance. The structure of taxation is usually built on the physical presence of
a business, but the importance of a virtual presence is also becoming vastly
necessary. With the changing tide of the digital economy, the Indian Government
has taken the first step in making digital economies taxable by promulgating
the concept of equalization levy in June, 2016, starting with online
advertising[2].
Equalisation levy is a tax imposed by the Government
of India for taxing multinational companies who do not have any physical
presence in India. It is a tax levied on the consideration received or
receivable for any specified services[3]
and they include “online advertisement, any provision for digital advertising
space or any other facility or service for the purpose of online
advertisement.”[4]
Eventual developments in the constantly evolving economy lead to rapid
digitalization of the Indian economy with numerous foreign companies entering
as players in the arena. Union Budget 2018-19 presented by the Indian
Government introduced various measures to tax digital entities with a
significant economic presence over the country. The concept of significant
economic presence (SEP) was brought into picture from April 2018, making some
necessary changes in the overall tax regime. The tectorial shift in the
policies proved to be a much needed relief for the government as it turned it
towards its benefit.
As per the Rules[5]
issued by the Central Board of Direct Taxes (CBDT) dated 13th of
July, 2018, certain rules regarding the concept of Significant Economic
Presence (SEP) as per Section 9(1)(i) of the Income Tax Act, 1961 were framed,
inviting comments and suggestions from the public. The modus operandi behind
issuance of the rules was clearly explained as the outdated system of nexus
rule which was based on physical presence was no longer holding well for
taxation of business profits in source country. The rules seemed to indicate
that the current nexus was no longer profitable in the present state, as the
rights of the source country to tax business profits derived from the economy
were being unfairly exploited.[6]
The Explanatory Provisions of the Finance Act issued through Circular[7]
dated 26th December, 2018 confirmed the term Business Connection
shall include “Significant Economic Presence” which underlined the action taken
by OCED through BEPS Action Plan 1[8] to
address the tax challenges in a digital economy.[9]
Explanation 2A[10]
was inserted into Section 9(1)(i) to provide for Specific Economic Presence
(SEP) in India shall also constitute an integral part of ‘business connection’.
The number of users and important threshold limits regarding the SEP are still
under consideration by the Government of India, and the foreign companies are
awaiting the parameters to be set so that the uncertainty floating in the air
is cleared and things move forward smoothly.[11]
India is a signatory to the BEPS[12]
under which a company with a digital base in India would have to pay taxes if
it conducts significant economic activities through its significant economic
presence in the country.[13] The
data localization policy[14]
adopted by the RBI through the directive issued under Section 10(2) read with
Section 18 of Payment and Settlement Systems Act 2007, (Act 51 of 2007) has
mandated all foreign digital companies to store date of its users in local servers
within a period of 6 months[15],
leading to the pathway for more stringent laws.[16] Policy
note[17]
released after the BEPS Inclusive Framework meeting which brought together 264
delegates from 95 member jurisdictions and 12 observer organisations focused on
two central pillars as how best to tax multinational foreign companies in a
digital economy. It is consistent with the Action 1 Report[18]
and Interim Report[19],
whereby the first pillar focuses on challenges of the digital economy and
allocation of right in taxation, and the second pillar talks about the
remaining BEPS issues.[20]
The members of the Inclusive Framework of the BEPS treaty are directing their
energies towards a long term solution till 2020, with a possible update on the
existing framework by March 2019.[21]
Comparatively, the
European Commission took small strides to introduce a Proposal[22]
for 3% tax on revenue earned from digital companies with revenues of 750M € per
annum. The opinion is divided among the European nations with some countries
actively opposing the move, and the rest propagating the change in policy. The
UK Government announced through its Budget, a 2% tax on digital media
platforms’ sales from April 2020 onwards, which drew huge criticism from the US
government who even though was welcoming of OECD’s efforts, did not
particularly like this shift in policy from the UK.[23]
According to the UK Chancellor Phillip Hammond, the proposed tax would be
carefully designed to ensure that it is targeted against multinational digital
giants, rather than startups.[24] As
per the current trends, there are still significant hurdles to overcome because
big companies like Facebook, Google and Amazon avoid taxes on profits paid by
normal companies because they do not have a physical presence and it becomes
necessary for the implementation of stricter laws.[25]
Contributed by – Adithya Reddy
[1] Surabhi
Agarwal and Megha Mandavia, India finds a
new way to tax Google, Facebook, The Economic Times, (Dec. 17, 2018, 8:31
AM), https://economictimes.indiatimes.com/news/economy/policy/localisation-heat-data-bank-here-may-help-government-debit-taxes/articleshow/67120911.cms.
[2]Maulik
P. Doshi and Jigar Doshi, What to expect
on the tax front in 2019, Mondaq, (Jan. 8, 2019), http://www.mondaq.com/india/x/769862/tax+authorities/What+To+Expect+On+The+Tax+Front+In+2019.
[3]
Section 162(i) of the Finance Act, 2016.
[4]
Nishith Desai Associates, Digital Economy
in India: Direct and Indirect Taxation, 1, 9 (2018).
[5]Central
Board of Direct Taxes, F.No.370142/11/2018-TPL.
[6] Ibid.
[7]
Explanatory Notes to the Provisions of the Finance Act, 2018, Circular No.
8/2018, F.No. 370142/07/2018-TPL.
[8] OECD(2013),
Action Plan on Base Erosion and Profit Shifting, OECD Publishing.
http://dx.doi.org/10.1787/9789264202719-en.
[9] supra note 6, at para 6.4, pg.18.
[10] (a)
transaction in respect of any goods, services or property carried out by a
non-resident in India including provision of download of data or software in
India, if the aggregate of payments arising from such transaction or
transactions during the previous year exceeds such amount as may be prescribed;
or (b) systematic and continuous soliciting of business activities or
engaging in interaction with such number of users as may be prescribed, in
India through digital means
[11] KR
Srivats, Digital Tax: Centre rakes in
moolah with ‘equalisation levy’, The Hindu Business Line,(Feb. 13, 2019), https://www.thehindubusinessline.com/economy/digital-tax-centre-rakes-in-moolah-with-equalisation-levy/article26260963.ece.
[12] supra
note
at 9.
[13] Varun
Aggawal, Digital firms with ‘big
presence’ in India will have to pay taxes here, The Hindu Business Line,(Feb. 05,2018), https://www.thehindubusinessline.com/info-tech/digital-firms-with-big-presence-in-india-will-have-to-pay-taxes-here/article22661713.ece.
[14] Reserve
Bank of India,Storage of Payment System Data,RBI/2017-18/153,DPSS.CO.OD
No.2785/06.08.005/2017-2018.
[15]
Paragraph 4, Press Release: 2017-2018/2642.
[16] Shreya
Ganguly, Tax Authorities mull ‘Digital
Tax’ on foreign internet companies, INC 42, (Feb. 15, 2019), https://inc42.com/buzz/tax-authorities-mull-digital-tax-on-foreign-internet-companies/.
[17]
Addressing the Tax Challenges of the Digitalisation of the Economy – Policy
Note OECD/G20 Base Erosion and Profit Shifting Project.
[18] supra note at 8.
[19] Tax
Challenges Arising from Digitalisation – Interim Report 2018.
[20] supra at 17, Para 1.2, Page 1.
[21] International community makes important
progress on the tax challenges of digitalization, Organisation for Economic
Co-operation and Development, (Jan. 29, 2019), http://www.oecd.org/newsroom/international-community-makes-important-progress-on-the-tax-challenges-of-digitalisation.htm.
[22] European
Commission, Proposal for a Council
Directive on the common system of a digital services tax on revenues resulting
from the provision of certain digital services, (Mar. 21, 2018), COM(2018)
148 final 2018/0073 (CNS).
[23]
Natalie Sherman, US attacks UK plan for
digital services tax on tech giants, BBC News, (Oct. 31, 2018), https://www.bbc.com/news/business-46050724
By Natalie Sherman New York 31 October 2018.
[24] Jim
Waterson and Alex Hern, Hammond’s digital
tax faces opposition from big tech firms, The Guardian, (Oct. 30, 2018),https://www.theguardian.com/uk-news/2018/oct/30/hammonds-digital-tax-faces-opposition-from-big-tech-firms
[25] Kamal Ahmad, EU pushes for new tax on tech giants ‘by Christmas’, BBC News, (Oct. 10, 2018), https://www.bbc.com/news/business-45813754 Economics editor 10 October 2018 EU pushes for new tax on tech giants ‘by Christmas’ Kamal Ahmed, October 10, 2018.
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