Modi government faces several hurdles in taxing international tech firms such as Google, Facebook, Twitter, and others.
Google Tax: The Modi government is making a serious effort to tax global technology giants such as Google, Facebook, Microsoft and Twitter on their income from Indian operations, but faces a herculean task because of the complex corporate structures, international tax treaty obligations and opaque information flow on transactions. India has raised this issue on international forums such as G20, but a global consensus on the issue is not in sight. Any move by India in the absence of a global understanding may invite reprisal from other nations, say taxation experts.
Internet giants like Google, Facebook, Twitter, LinkedIn and WhatsApp have large user bases in the country. India has the world’s largest Facebook userbase of some 260 million people, followed by the US which has 190 million. Similarly, the country has more than 200 million WhatsApp users. India also has more than 50 million LinkedIn users that account for almost 10% of the professional networking giant’s global user base.
These tech firms make money from advertisements and a host of other services. Indian efforts are directed at collecting both direct and indirect taxes from these companies. India levies corporation tax on the income generated by Indian and foreign companies. It also levies GST, which is an indirect tax, on the supply of services.
At present, the rules drafted by the Organisation for Economic Co-operation and Development such as the Model Tax Convention on Income and Capital govern the transactions of foreign entities serving customers in India. According to these conventions, the companies are taxed as per domestic laws where their permanent establishment is located.
Since 2016, the government is levying an equalisation levy on providing online advertisement or digital services through the entities registered outside India. This equalisation levy, which is a direct tax, is collected at the source by the service recipient Indian entity at the rate of 6% of the billed amount if the bill value exceeds Rs one lakh in a financial year. And the responsibility for paying this equalisation levy eventually falls on the Indian entity that avails the services of these tech giants having registered offices outside India.
Moreover, there is no clarity on whether the taxes paid by these companies are commensurate with the scale of their business operations in the country or not. Tech giants like Facebook and Google are also under the scrutiny of Income Tax department for under-reporting the scale of their online advertising business in the country.
The government is also trying to collect indirect taxes like GST on the business activities of these tech firms. The country levies GST on availing the services of these internet giants by the entities registered in India under the reverse charge mechanism (RCM). However, the responsibility of paying the GST under the reverse charge mechanism falls on the service recipient rather than on the supplier of the service like Google or Facebook.
In absence of a globally accepted way for taxing these tech giants, India is seeking help of top 20 economies of the world to evolve a consensus to tax these companies. According to Sameer Jain, managing partner of PSL advocates and solicitors, some other countries like Italy, Israel and Hungary have adopted a similar model of imposing an equalisation levy, while China has its own way of taxing foreign technology firms.
According to tax experts, the biggest problem in taxing these internet giants is that the location of their permanent establishment is registered outside the country.
“We cannot tax those entities that are not located in our tax jurisdiction,” said Sumit Dutt Majumdar, former chairman of the Central Board of Excise and Customs (CBEC), the apex body to administer indirect taxes in the country. CBEC has been renamed as CBIC – Central Board of Indirect Taxes and Customs – after implementation of the GST.
“Foreign entities which do not have a permanent establishment in China are subject to a 10% withholding tax on the China sourced income which includes dividend, interest, rental, royalty, income from property transfer, donations and etc.,” said Sameer Jain, Managing Partner of law firm PSL Advocates & Solicitors.
But tax experts like Sameer Jain also advise against using strong measures by the government to tax these giants like blocking their URLs or forcing them to register an entity in India before they can start offering their services in India.
“A decision like this would effectively be forcing foreign companies to set up shop in India for the sole purpose of taxation,” Sameer Jain told Financial Express Online adding that if India decides to implement a draconian policy like this, there are possibilities of similar sanctions being imposed by the countries where these foreign companies are registered, severely impacting the Indian economy.