India Goes After Digital Giants in Budget 2018

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By Siri Bulusu

India is proposing to tax income generated by companies such as Alphabet Inc.'s Google, Facebook Inc., Netflix Inc. and Apple Inc. by expanding the applicability of income tax to include the digital transfer of goods and services to users in India.

The Finance Bill 2018-19 proposed to amend Section 9 of the Income Tax Act to expand the definition of a “business connection” in India to include “significant economic presence,” a move that could impose a 40 percent tax on any foreign company rendering digital goods or services to India.

“The existing nexus rule based on physical presence do not hold good anymore for taxation of business profits in source country. As a result, the rights of the source country to tax business profits that are derived from its economy is unfairly and unreasonably eroded,” India’s 2018 budget memorandum said.

Under Section 9 of the Income Tax Act, 1961, income earned directly or indirectly through any business connection in India is subject to domestic tax. The previous definition relied heavily on physical presence, but advancements in technology and availability of internet in India is pushing the Indian government to expand the definition to include foreign digital service providers.

Homing In

The budget memorandum said the proposed amendment “will enable India to negotiate for inclusion of the new nexus rule in the form of ‘significant economic presence’ in the Double Taxation Avoidance Agreements.”

Double Taxation Avoidance Agreements will prevent foreign companies from paying tax on income deemed to be generated in India, but India is eager to renegotiate those agreements to bring such income under its jurisdiction, Pallav Narang, partner at the chartered accounting firm Arkay & Arkay, told Bloomberg Tax in a Feb. 1 email.

“Such businesses who find themselves covered within the ambit of this expanded definition will now have to pay taxes in India on all income as is attributable to such transactions or activities in India irrespective of whether or not they have a permanent place of business in India,” Narang said.

The Definition

The 2018 Budget proposes that “significant economic presence” is defined as:

  •  Any transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India if the aggregate of payments arising from such transaction or transactions during the previous year exceeds the amount as may be prescribed;
  •  Systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means.
“A plain reading of the definition should be enough to let the reader know that this enhanced scope of business connection now encompasses Software, SAAS, Digital goods, Search, advertising and various other sundry online businesses whose incomes were not taxable in India yet,” Narang said.

An equalization levy on advertising spending by foreign companies has already been made taxable in India, Narang said, and now the total incomes of such entities has been included in the ambit of taxation.

Once amendments and proposals are reviewed, they must be approved by both houses of parliament before the end of the budget session.

To contact the reporter on this story: Siri Bulusu in New Delhi at correspondents@bloomberglaw.com

To contact the editor on this story: Penny Sukhraj in London at psukhraj@bloombergtax.com

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