New Delhi: India, among the first countries to impose an equalization levy to tax the digital economy, is looking at framing watertight regulations to ensure that global online businesses that earn considerable revenue from India are taxed in the country.
The 6% levy announced in the budget is structured in a way to ensure that every entity making a payment to the non-resident for online advertisements will have to deduct this tax before making the payment.
This means that even if the payments are routed through Indian arms of the global companies through back-to-back service contracts, the entity which is making the final payment from India will have to deduct the tax.
Also, to ensure that there are no constitutional challenges, as well as conflicts with India’s existing tax treaties with other countries, this levy has not been included in the Income Tax Act. It instead finds a place in the finance bill. This will make it difficult for global firms to claim tax credit from foreign governments for the levy.
Alphabet Inc., Facebook Inc., Twitter Inc. and other online digital portals that get significant online advertisement revenues from India are expected to be impacted by this levy.
Spokespersons for the three firms declined to comment.
“We’ve studied business models in India, and this so-called Google tax is structured in a way that it suits those models. The business models that major foreign digital companies operating in India follow is by having a subsidiary in India which is a service provider or service centre and income flows through that subsidiary to the parent abroad,” said a senior income tax department official, who did not wish to be identified.
“If an Indian business entity is making a payment to the Indian subsidiary of the foreign company, then there is no levy on that payment. But if that subsidiary remits that money abroad, then that levy kicks in,” the official said.
The official pointed out that the principle behind the levy is to ensure that domestic and foreign entities undertaking the same business activity in India are taxed broadly at similar levels.
“At present, the Indian company that provides such services will be subject to 30% tax on a net basis. But if a foreign company provides the same services, it claims not to be liable to pay tax in India,” the official said.
Finance minister Arun Jaitley, in his budget speech last month, announced the introduction of the equalization levy for any payment that exceeds Rs.1 lakh a year from an Indian company to a non-resident.
“The Indian tax department is looking to bring in a levy where any payment to a non-resident towards online advertising is taxed in India. It flows from action point one of the base erosion and profit shifting guidelines that talks about taxing the digital economy, and follows the concept of taxing those entities which are in essence stateless and do not pay taxes anywhere in the world,” said Mukesh Butani, non-executive chairman of BMR Advisors and managing partner of BMR Legal.
“India is among the first to implement this, and many foreign technology companies are anxious to see how this levy pans out, and if other countries will follow India’s example and bring such a levy,” he said.
“Taxing companies with no permanent establishment in India would have been in conflict with India’s double taxation avoidance agreements with other countries. That it is why the government has made it a part of the finance bill,” he said.
“The idea is that India should get a share of the global digital economy since many online portals earn a substantial amount of revenue from India,” said Rahul Garg, who leads the direct tax practice at PwC India.
“Many of the Indian arms of these foreign companies enter into contracts with the Indian advertiser while simultaneously entering into a contract with the parent,” said Garg, adding that most of the advertising revenue flows to the foreign parent entity.
Moulishree Srivastava contributed to this story.