Google, Facebook, Twitter, Amazon stare at 30-40% digital tax blow in India

At present, India has the equalization levy framework for limited foreign transaction happening digitally

Global technology giants such as Google, Facebook, Twitter, and Amazon may soon have to pay a ‘digital tax’ in India. The Central Board of Direct Taxes (CBDT) has prepared a draft proposal under the newly introduced concept of “significant economic presence”, also known as digital permanent establishment (PE), which seeks to impose tax at 30 to 40 per cent rate based on the revenues and user base of such companies in India, sources familiar with the development said.  

“This is for digital services offered by global firms in the country from the unit based outside the country. The new tax will be imposed on the basis of revenues derived from the activities of Indian users of search engines, social media platforms, and online marketplaces,” said a senior tax official, adding that only firms with a user base of over 200,000 would be considered.  

The proposed tax is in line with the current tax structure for foreign companies that have their branches in India. Large Indian companies pay 30 per cent corporate tax, while subsidiaries of foreign companies in India have to shell out 40 per cent. Besides, the tax department levies 6 per cent for the payment made by a resident firm to foreign e-commerce companies for online advertisement. Last year, the department collected about Rs 800 crore through this levy, said the official cited above. 

The CBDT’s draft proposal has been taken up with at least 180 countries, of which about 70 per cent backed the move. Some of the countries have already started imposing the digital tax. “We have received positive feedback from several countries and even other stakeholders we called for the opinion,” the official said.

The tax authorities, though, are facing opposition from global players who will be directly affected by the move. The main contention is that some of the big players operate in India through their Indian arm or through a foreign subsidiary. The new rules might force them to change their holding structures.

Tech companies see huge business potential in Asian countries, where Internet usage is increasing drastically. According to estimates, India may witness 635.8 million Internet users by 2021. 

The argument that these companies do not have permanent establishment (PE) has been raised at many international forums. Many countries say that most of their services are rendered digitally, but they pay just penny in their own country, said a tax expert.

Officials say such a decision could not be unilateral as this is a complex area and need proper understanding and execution. If not handled properly, this could be interpreted as double taxation, which could discourage investments and the trade relationship. “The final guidelines will be out after considering the multilateral tax agreement or tax treaties as well as action plans under base erosion and profit shifting. The consensus is expected to come by 2020,” said the official.

Explaining the concept of ‘Significant Economic Presence’, the Finance Bill 2018 said: “With the advancement in information and communication technology in the last few decades, new business models operating remotely through digital medium have emerged. As a result, the rights of the source country to tax business profits that are derived from its economy are unfairly and unreasonably eroded.” 

The CBDT says the existing rule based on physical presence no longer holds good for taxation of business profits in source country.

Taxing times 

• CBDT's proposal will hit tech giants like Google, Facebook, Twitter and Amazon
• Firms with consumer base of over 200,000 will fall under its ambit
• Tax rate will be in the range of 30 to 40 per cent, depending on the user base and revenues
• Majority of nations are backing up India for imposing the digital tax
• New guidelines will be under the 'significant economic presence' framework as against the current 'permanent establishment' criterion