As per the reports, recently, India has introduced an enabling provision that will make an overseas platform that advertises, streams or sells goods to an Indian IP address taxable in the country.
How Did This Happen?
This move basically marks the first step toward a global digital tax and means that India will be ready to implement the levy once the Organisation for Economic Cooperation and Development (OECD) framework, currently under discussion, is finalised.
With this policy, the government will then be able to tax revenues of ecommerce firms such as Amazon, Alibaba and Ebay selling goods or services based on data collected from residents and those engaged in targeted advertisements such as Facebook and Google, besides streaming services like Netflix.
This will also cover the monetising data, through cookies for instance.
In 2016, India had imposed a 6% equalisation levy, sometimes referred to as the ‘Google tax’.
Though, this latest development is a significant move toward capturing tax on incomes earned by overseas companies through consumption by Indians.
A senior government official said “The idea is to have an enabling framework in place so that once the OECD framework is ready, we can go ahead,”.
While the proposed changes will be implemented only after OCED unveils the global framework.
What Does This Bill Propose?
As per the reports, the Finance Bill has proposed changes to the income tax Act to add new source rules that deem certain types of a foreign assessee’s income to be of Indian origin and hence taxable in the country.
In this regard, the government has introduced explanation 3A in Section 9 of the income tax Act on “income attributable to operations carried out in India”.
This will also consider the income of non-residents from advertisements targeted at Indian customers or accessed through Indian IP addresses; income from the sale of data collected from an Indian resident or from a person using an Indian IP address; and income from the sale of goods or services using data collected from an Indian resident or from a person using Indian IP address.
Rohinton Sidhwa, partner, Deloitte India said “these proposals broadly attempt to capture the thinking currently ongoing at international forums where the taxation system for the digital economy is being evolved,”.
How Is It Going To Affect?
According to some experts, this may raise queries over tax treaty implications.
Rakesh Nangia, the chairman, Nangia Andersen Consulting said “It will also be interesting to see the interplay of these provisions with the equalisation levy, which appear to be overlapping in case of some transactions, especially online advertisements and also interplay of relevant tax treaty provisions, which may not permit taxing these transactions in India in their present form,”.
On October 9, the OECD had released a draft on the taxation of digital companies for public comments.
National leader (tax), Grant Thornton India, Vikas Vasal said “These provisions significantly widen the tax net to cover foreign enterprises doing business in India through online modes,”.
Why This Concept?
Basically, the government had introduced the concept of significant economic presence (SEP) in line with its plan to tax digital companies in the Finance Act, 2018.
However, SEP was defined to mean, among other things, systematic and continuous soliciting of business activities or engaging in interaction with such a number of users as may be prescribed in India through digital means.
Earlier, this provision was proposed to be effective from assessment year 2021-22, but has now been deferred to 2022-23.