Digital Tax trends in Indian Economy with comparative analysis of other nations

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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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