India Gears up for Digital Taxation

The outbreak of the Coronavirus has made it a necessity for most businesses to cut across the conventional commercial model and move to the digital ones in order to survive and stay ‘healthy’. Businesses have amplified the usage of information technology abruptly and hence, perform their business transactions with minimum physical presence in other jurisdictions. What is obvious to an accountant is that whenever there are any ‘commercial expansions’ strongly influenced by technology, taxation and regulations also need to be suitably modified.

India has nearly 50.4 crore Internet users¹ making it the second largest after China. Yet majority of the country’s tax law framework covers transactions occurring in a conventional business model. Thus country’s regulators need to modify and make laws to regulate those unprecedented transactions happening digitally or those traditional transactions which are now substituted by digital technology.

In the recent financial years, the Union Government has made amendments to widen the tax base for including the following transactions:

The Finance Act, 2020 introduced some new provisions and amended some existing ones to ensure no value generated by the digital transactions remain out from being taxed. They are as follows:

1. Amplified Scope of Equalisation Levy

Back in 2016, the government introduced the concept of ‘Equalisation levy’ (also referred to as Google Tax) which aimed to tax the gross consideration payable to a non-resident for online advertisement, providing digital advertising space or other services connected with online advertising to be taxed at the rate of 6%. The Indian government was successful to bag taxes over INR 560 - 590 crores in the form of equalisation levy during the financial year 2017-2018².

However as per the latest amendment, with effect from 01st April, 2020 the scope of equalisation levy would be applicable to the consideration received/receivable by non-resident e-commerce operators from following activities:

to a:

The levy is fixed at 2% of the consideration receivable (or received) and the obligation of payment and compliance is on the non-resident recipient. What is noteworthy is that the existing 6% of the equalisation levy was on the Indian payer unlike the recent amendment which poses the requirement on the recipient.

No equalisation levy will be applicable if the e-commerce operators have PE within the country and the activities performed against which the consideration received pertain effectively to that PE. No levy will also be applicable in cases where the sales, turnover or gross receipts of the e-commerce operator from such e-commerce supply is less than INR 2 crores during the financial year.

2. Amendment to the Provisions for SEP (i.e. Nexus Rule)

With effect from April 01, 2018 the government came up with the concept of ‘Significant Economic Presence’ (SEP). According to this, a non-resident would be subject to tax if it has any Significant Economic Presence in India. However, the government has not yet fixed the threshold limits viz the revenue limit as well as the number of users limit as this is expected to be fixed when the G20-OECD Reports are made available. This OECD framework is currently under discussion and likely available by the end of this year.

In the Finance Bill 2020, insertions were made to the SEP rule has to include the following:

As explained above, due to the latency in the G20-OECD Report, the applicability of the SEP Provisions is postponed to Fiscal Year 2021-22 (AY 2022-23). Businesses now have time to evaluate the tax related exposures and consider if they can work on to reduce such exposures by restructuring their business model.

Thus the strategy of equalisation levy coupled with the concept of Significant Economic Presence are in track with the Organisation for Economic Cooperation and Development (OECD) BEPS Action 1 report of 2015, to tax those digital giants for revenues earned as explained above.

3. Withholding of Taxes (WHT) under Section 194-O

The government also laid down the provisions of withholding tax on the sale of goods/provision of services through a digital platform under section 194-O. The e-commerce operator is required to withhold tax at 1% of the gross amount of sales/provision of services facilitated by it through its digital platform. In the case of non-availability of a permanent account number (Indian income tax registration) of the e-commerce participant, the withholding tax rate would be increased to 5% (Section 206AA). The e-commerce operator has to withhold tax at the time of credit or payment to the e-commerce participant, whichever is earlier. What is noteworthy is that the e-commerce operator is deemed to be the person responsible for paying to the e-commerce participant.

Again defaulting in withholding of taxes by the e-commerce operator would make him liable to bear additional costs of interest, penalties and face consequences of disallowance.

Considering the hardships of the small businessmen, it is suggested that no withholding may be necessary if the e-commerce participant is an individual/HUF and if the gross amount of sale of goods, services, or both during the previous year does not exceed Rs 5 lakh, provided the e-Commerce participant has furnished their PAN or Aadhaar. Also, no withholding may be necessary if the e-commerce participant is a non-resident.

Please note that the withholding explained in the above is applicable with effect from October 01, 2020.

What These Amendments Mean to India?

In the recent past, the non-resident digital giants, despite not having any physical presence within India, managed to make huge chunks of revenue from the country, paying no taxes thereon by remaining outside the ambit of the tax framework. However, this will no longer be possible. Thus, companies with no physical presence but earning revenues from the country’s ‘person’ will no longer be able to evade taxes by moving to the tax heavens. By implementation of those explained above, huge additional revenues are likely to flow to the government in the near future.

What These Mean to the World?

The flip side however doesn’t look very well either. The country’s imposition of digital taxes may affect the commercial relationship between India and other countries especially the United States as most of these digital giants affected by the above ‘reside’ there. Domestically, the start-ups’ dependencies on these digital platforms is quite high and hence their growth may be adversely hit by the above implications. Administrative burden in terms of cost and money is inevitable. Lastly to survive the impact of the withholding or charge on their revenues, companies may prefer hiking up their prices and making it costly for domestic users to access such digital platforms.

Conclusion

By the above amendments, the Indian policy makers have firmly laid concrete step to move from conventional tax models to modern digitalized business processes. This welcome move of the government is in consensus with the modern buying behavior of the masses and hence, is making Indian Tax Structure future ready. More so in the current situation, it is helping the government to collect revenues despite undergoing the adverse economic conditions caused due to the Coronavirus outbreak. ∎∎∎