India’s Google Tax

  • Blog|Income Tax|
  • 563 Views
  • |
  • 5 Min Read
  • By Taxmann
  • |
  • Last Updated on 8 April, 2021

Introduction:

With ever-evolving information technology, the businesses have found unique ways to conduct their businesses just by relying on digital technology. In the last decade or so, business models have emerged that can be conducted primarily by exchange or transmission of data. Digital economy’s salient features may be summed up as mobility, reliance on data including so-called big data, network effects which include user participation, integration, use of multi-sided business models, i.e. market may be in different tax-jurisdictions, Volatility due to low barriers to entry and rapidly evolving technology (Section 4.3 of the BEPS Report on Action 1 and on-line mode – Paragraph 117 of the BEPS on Action 1 (2015)). According to the Government and industry estimates, the digital economy is expected to reach $1 trillion in the next few years.

India’s Initiatives:

In the first instance, the Central Board of Direct Taxes (CBDT) in 2001 set-up a Committee on e-commerce taxation under the Chairmanship of Sri. Kanwaljit Singh. The said committee felt that ‘there is no case for exemption from Direct Taxes. CBDT has set-up another committee on taxation of e-commerce under the Chairmanship of Akhilesh Ranjan. The said committee on Taxation of E-commerce has submitted its report on 21st March, 2016. Committee’s key observations were: i) Redundancy of physical presence in other tax jurisdictions ii) Characterizing the payments for digital goods and services iii) Significant challenges to levy taxes in the source jurisdiction iv) Unfair advantage over domestic players v) The necessity of withholding tax on digital transactions and equalization levy. Its Key recommendations are:  i) Equalization levy may be imposed on payments for specified services. ii) A separate chapter may be included in the Finance Act. iii) The equalization levy may be between 6 to 8 per cent. iv) Exemption of such transactions may be extended u/s. 10 of the Income-tax Act, 1961. v) Implementation and impact of Equalization levy may be monitored on a regular basis. In addition to above and to imply OECD’s obligations on BEPS Action Plans, the Central Government introduced an ‘Equalization Levy’ on 12 digital services which include online advertisement and other related services as a separate chapter in the Finance Act, 2016 with effect from 1st June, 2016.

Post Implementation/ Union Budget 2018:

It is now thirty months since ‘Equalization Levy or ‘Google Tax at 6 per cent’. According to latest media reports, the Government has earned an aggregate ‘Equalization Levy’ between Rs.1,000 cr. to 3,000 cr. Approx. However, it is felt that whatever collected is just a tip of the iceberg.

Business Connection:

Whether the term ‘Business Connection’ is defined in Indian tax laws? Yes, but inserted as an Explanation 1 to Section 9 (1) by the Finance Act, 2003 w.e.f 1-4-2004. A plain reading of the said Explanation reveals that only such part of the income as is attributable to the operations carried out in India are Taxable. Thus, the existence of a permanent establishment would not constitute a ‘business connection.’   A business connection may be in the form of a branch office in India or an agent of a non-resident in India and includes such business activity carried out through a person who is acting on behalf of such non-resident with an authority to conclude such contracts except activities which are limited to the purchase of goods for the non-resident. In case of absence of any such goods, secures orders on behalf of the non-resident that will be treated as a ‘Business Connection’. Exceptions may be summed up as- 1. Any business activity carried through a broker, general commission agent or any other agent but under different management or in his independent capacity. 2. In the case of a non-resident, business activity confined to the purchase of goods in India for the purpose of export. 3. In the case of a non-resident news agency, where business activity confined to the collection of news, etc. 4. In the case of a non-resident business engaged in the business of mining where the activities are confined to the display of uncut and unassorted diamond in any notified SEZ.   5. In the case of a non-resident individual, a firm which does not have any resident partner, a company which does not have any resident shareholder involved in the business of shooting.

Equalization Levy:

Clause (50) of section 10 provides that any income arising from such specified services under clause(I) of section 161 of the Chapter of VIII of the Finance Act, 2016 on or after 01.06.2016 shall be chargeable to ‘Equalisation levy at the rate of 6 percent.’

Compliance – In Brief:

1.

Chargeable

Annual payment of Rs.1,00,000 made to a non-resident service provider in one financial year.

2.

Deduction by/ Time

By resident person or foreign company having a Permanent Establishment in India at the time of actual payment or when the obligation to pay arises, whichever is earlier.

3.

Payment to the Central Government

By 7th of the month immediately following through ITNS 285

4.

Statement of specified services

In Form No. 1 by on or before the 30th June immediately following that financial year.

5.

Non-Compliance

In case of non-deduction: Penalty will be equal to the amount of levy failed to be deducted along with applicable interest at the rate of 1 per cent and depositing of the levy outstanding.

 

In case of non-deposit: penalty will be equal to Rs. 1,000 day subject to the maximum of the levy failed to be deducted along with applicable interest and depositing of the levy outstanding.

 

Disallowance under section 40(a)(ib) of the Income-tax Act, 1961 in the hands of the payer.

 

For non-filing of the statement of compliance – Rs. 1,00 day for each day the non-compliance continues. In case of a false statement filed, the person may be subjected to imprisonment of a term up to 3 years and a fine.

 

India – A Way Forward:

1. Time to expand the scope of the levy, namely –

  • Online sale of goods & services
  • Online consumption of news, etc.
  • Advertising on Radio or Television
  • Digital space for websites -mail & blogs
  • Downloading of online movies, games, software, apps, etc.

2. Review of equalization levy:

Because of the low yield and also fact that Committee has recommended levy up to 8 percent, the Central govt. shall take a call and increase it to 8 or even up to 10 per cent in the interest of the revenue.

3. Enabling provision to claim Foreign Tax Credit:

A suitable provision to address such issues relating to double taxation are required to be revisited, which would enable Foreign Service provider or non-resident service providers to avail of FTC in his/their home country.

4. Amendments to DTAAs – Need of the Hour:

Simple insertion of an Explanation to the taxing statues does not automatically update the Indian tax treaties with other countries. As on date, India has signed up more than 80 DTAAs with 80 plus tax jurisdictions.

Concluding Remarks:
 
It would be appropriate to recall the words of Sri. Sundar Pichai, the CEO, Alphabet Inc., while delivering his speech at the World Economic Forum in Davos, Switzerland on 24th January, 2018 who said that Google is happy and willing to pay more taxes globally, whatever the world agrees to but the question is where Google should pay? No worries!! The Organisation for Economic Co-operation and Development (OECD) and the economies across the world are working to tax the digital service giants. The spread of digital economy poses challenges for both domestic as well international tax domains.
 
 

Author: Prabhakar K.S. Tax Law Professional.

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

Comments are closed.

Everything on Tax and Corporate Laws of India

To subscribe to our weekly newsletter please log in/register on Taxmann.com

Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied