From Amazon to Google: Global SaaS companies face fresh tax demands

Demands raised for FY22, FY23

Marquee foreign companies — including Microsoft, Amazon, Google, Oracle, IBM, and Salesforce — providing software-as-a-service (SaaS) products are facing fresh tax demands for 2021-22 and 2022-23.

 

According to sources, the income-tax department has issued assessment orders to these companies, treating the revenue earned by them from Indian customers as “fees for technical services” (FTS) under Indian tax law.

 

Any payment for technical, managerial, or consultancy service is treated as FTS and there is a 15 per cent tax on it under the India-United States double tax avoidance treaty.

 

Email queries sent to the companies as well as the Central Board of Direct Taxes (CBDT) didn’t elicit any response till the time of going to press.

 

Before 2021, similar payments were often treated as “royalty”.

 

However, the Supreme Court, in a landmark judgment in 2021 in the Engineering Analysis Centre of Excellence case, held payments for standard, off-the-shelf software were not taxable as “royalty” under Indian law or most tax treaties.

 

Despite the ruling, the tax department began examining whether payments made by Indian users to foreign SaaS providers could be taxed as FTS, particularly when the software performed automated functions that would otherwise require human input. 

 

“The department has now passed assessment orders for FY22 and FY23, proposing tax demands, even though many companies have paid the 2 per cent equalisation levy on these transactions during that period. This is leading to double taxation,” a person familiar with the matter said.

 

The finance ministry has said such companies paid the equalisation levy voluntarily even though they are mandated to pay tax on FTS in accordance with income-tax law, a tax expert said.

 

India introduced the levy in 2020 on non-resident ecommerce operators that had significant Indian user bases but no physical presence.

 

These levies were intended as backstop taxes, applicable only where income-tax provisions and tax treaties could not be invoked.

 

The government agreed to phase out the unilateral levy in April 2024.

 

Experts have warned this approach could result in double taxation, with companies having paid the levy on gross receipts and now facing income-tax demands on the same income, without any clear mechanism to claim credit.

 

Tax experts say SaaS services — being automated and standardised, and involving neither human input nor a transfer of intellectual property — do not qualify as royalty or FTS under Indian law or the India-United States tax treaty, which contains a narrow definition of FTS.

 

“Having regard to the Supreme Court’s decision in Engineering Analysis, the income of SaaS companies should not amount to royalty. Also, given that SaaS is a standard facility provided to clients, the income ought not to qualify as FTS,” said Himanshu Parekh, partner at KPMG.

 

“The case is stronger under treaties with countries like the US, the United Kingdom, and Singapore, which have more restrictive definitions of FTS.”

 

Legal experts expect the companies to challenge the assessment orders.

 

“Unless the CBDT issues guidance clarifying the department’s position, the matter is likely to lead to fresh litigation and greater uncertainty for foreign digital businesses operating in India,” another expert said.