Digital players such as Google, Facebook and mobile application services providers must pay taxes in India on income generated from Indian consumers even if the companies’ infrastructure is physically located abroad.
According to a new proposal in the Finance Bill, entities involved in digital transactions shall be considered to have significant economic presence in India, whether or not the entity has a residence or place of business in India. The government has, however, not defined what constitutes “significant economic presence” and whether it will differentiate between a Silicon Valley company earning $100 from Indian users and one earning billions.
According to Shashishekhar Chaugule, Partner at Walker Chandiok & Co LLP, the rule would also impact entities which do not have a physical presence in India but sell goods or services using the digital mode. There many instances of developers of applications, which are downloaded by Indians, residing abroad. They will now be liable to pay tax in India if they are deemed to have significant economic presence.
The rule will also impact companies such as Google, which have some physical presence in India but have their core infrastructure such as servers located abroad. Recently, the Income-Tax Appellate Tribunal ruled that payments made by Google India Private Ltd to Google Ireland Ltd for purchase of ad space on Google’s AdWords programme would be considered royalties.
The Tribunal held that since royalty payments were subject to tax in India, Google India should have withheld tax on the same. Google India had held that these amounts would be considered business income in Google Ireland’s hands.
The new explanation allows the Centre to tax transactions 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 and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India, through digital means.
“It is further proposed to provide that the transactions or activities shall constitute significant economic presence in India, whether or not the non-resident has a residence or place of business in India or renders services in India,” the Finance Bill states. These amendments will take effect from April 1, 2019 and will apply to assessment year 2019-20 and subsequent years.
“While the new explanation could generate more tax litigation, it is in line with the Base Erosion and Profit Shifting (BEPS) treaty, which targets companies that exploit gaps in tax rules of different countries to shift profits to low- or no-tax locations,” said Riaz Thigna, Director at Grant Thornton.
India is a signatory to BEPS, under which a company that has its base in any BEPS signatory country will have to pay taxes in India if it has significant economic activities in India. The latest proposal implies that companies that do not have a base in a BEPS signatory country will also be liable to tax in India because of a defined law in India.