The digital revolution has placed India in a unique leadership position globally and the country is at the cusp of witnessing the next technology wave.
- Tapati Ghose and Anita Nair
India is the fifth largest economy in the world. Needless to say, it presents a goldmine for digital businesses that are attracted to the country’s huge market home to over a billion people, which is a very lucrative potential user base.
The digital revolution has placed India in a unique leadership position globally and the country is at the cusp of witnessing the next technology wave. Growth of the digital economy has fueled continuous disruption that has been displacing conventional businesses and upending extant business dynamics. Governments worldwide, through the OECD BEPS project and closer home through a slew of domestic tax law amendments, are seeking to bridge the gap created by technology outpacing tax laws designed to cater to a brick and mortar economy. Digital business models have struck at the root of Indian tax laws, blurring differences between doing business ‘with India’ and doing business ‘in India’ mainly as large revenues were being derived from India without any form of physical presence in India.
This led to the search for new nexus rules to determine taxable presence in any country, targeted by digital businesses such as e-commerce businesses, search engines, social media platforms, aggregators etc. The OECD BEPS Action Plan 1 on digital economy, as well as the succeeding OECD interim reports on this subject, have identified data and user participation as key features of digitalised business models.
More persons switching to online transactions daily, deeper internet penetration, easier availability of new access at affordable rates, rise in smartphone users, active social media culture with digital footprints, have all created an innocuous but powerful tool that has mapped the mind of the user – ‘user data’. This may be either user generated content e.g. travel reviews, food reviews etc. or trends gathered through users’ web usage patterns etc. Thus, data has also been commoditised and has a market considering that target advertising holds the field as the best marketing strategy.
This has set the backdrop for Indian tax laws’ tryst with data in a digital world.
Business connection source rule
Aligning itself to BEPS Action Plan 1, India’s tryst with data as a proxy for taxable presence began with the introduction of the Significant Economic Presence rules vide Finance Act 2018. Among other conditions, nexus was sought to be established through download of data in India or engaging in interaction with users in India, whether through digital or other means.
Considering that the final OECD Report on digital economy is expected by end of December 2020, Budget 2020 has postponed the applicability of SEP provisions which will take effect from 1 April 2022.
‘Data’ once again came under the government radar this Budget by the widening of the source rule for taxation of income from business connection to include income from highly digitised business models that leverage on data collected from a market economy. The Explanatory Memorandum to Budget 2020 indicates that there is near consensus among countries in international forums that income from sale of data collected from Indian users or income generated from sale of goods or services that were enabled through use of data collected from Indian users, needs to be accounted as part of Indian tax revenues. India’s approach is aligned to the discussion in the latest OECD Program of Work on the taxation of digital economy which seeks to grant user jurisdictions, the right to tax through changed nexus rules as there is value to be taxed in data generated and user participation.
While this wider definition of business connection may be relatively dormant today, given that India’s tax treaties have not been amended to widen the definition of Permanent Establishment, once MLI comes into force from 1 April 2020 in India, one would need to be wary of the consequences of this amendment if tax treaty benefit is denied in any case.
In a recent development, amendments to the Finance Bill 2020 as passed by the Parliament have widened the ambit of Equalisation levy to extend to consideration received on e-commerce supply or services by a non-resident to Indian residents or Indian IP users procuring goods and services online as well as non-resident buyers in certain ‘specified circumstances’. It is interesting to note that one of the ‘specified circumstance’ in which the levy could be imposed on sale of goods or services to a non-resident buyer is ‘sale of data collected from an India resident or a person who uses an IP address located in India’. This is yet another example of data being used to establish nexus for tax sought to be levied by India on a non-resident e-commerce supplier or online market place.
Personal Data Protection Bill, 2019
The Economic Survey 2018-19 said that data must be treated as a public good but cautioned that privacy implications of the data need to be factored in. Similar to the EU General Data Protection Regulation (GDPR), India has formulated the Personal Data Protection Bill 2019 which is pending enactment. In recent years the world has been witnessing information explosion. People are shifting large part of their daily activities online which leaves digital footprints and enormous data on various data repositories that provide valuable but perhaps sensitive or confidential information about users. The government is cognizant of the importance to ensure that such data is not misused.
The Reserve Bank of India has mandated that financial data of Indian nationals must remain in India. The final contours of the Personal Data Protection Bill 2019 is being anxiously awaited by impacted players considering the mandate to store/ process sensitive/critical personal data only in India, failing which stringent penal consequences devolve. For other categories of data, at least a copy of the data must be stored locally. This development is expected to have manifold implications in terms of the manner in which business is conducted in India by such players, the infrastructure investment required for data centres/ storages, processing in India and whether these activities/ facilities in India would result in a tax presence in India.
Recognising that there will be a huge demand for data centres, the FM in this Budget announced that data centre parks would be set up throughout the country pursuant to a policy which would permit firms to incorporate data in every step of the value chain. There could also be local demand for such data centres considering the start-up boom in the country.
India has the potential to emerge as the world’s largest hub for data centers considering the rapid growth in the number of smartphone users, internet users, social media users. This number of users is set to increase with other government initiatives as part of the Digital India initiative viz. all public institutions to be provided digital connectivity, fiber-to-home connections (FTTH) connections through Bharatnet to link 1,00,000 gram panchayats every year, government schemes to enable direct benefit transfers and financial inclusion on scales never imagined before.
Use of tax as a tool for data collection by the government
Tax collection at source (TCS) was hitherto being applied in respect of certain specified goods where the seller was required to collect tax from the buyer at the time of sale of goods. In this Budget, the ambit of TCS has been widened to cover sale of all goods on consideration received from a buyer in a year, in excess of INR 50 lakh, at the rate of 0.1 percent (1 percent in some circumstances). Although the tax collection is at a nominal amount which may not largely augment tax collections, it enables creation of a data trail regarding sale of goods.
Thus, tax is being deployed as a measure of data collection to enforce maximum tax compliance by the government. In the recent past, some taxpayers have been receiving notices to reconcile common data points in service tax returns and income-tax returns. This is yet another instance of data being used seamlessly across various tax wings of the government to investigate records of errant taxpayers.
Data as a tool to aid taxpayers In the current Budget, the government has also proposed that with the advent of new technologies and by preponing the date of submission of Accountants Reports required under various provisions of Income-tax Act, pre-filled tax returns will be provided to taxpayers to
expedite and simplify the tax return filing process.
Digital technology is also being used to migrate income tax assessment and first level appellate proceedings to the faceless mode through e-assessments and e-appeals. This will also help create a digital trail of an assessee’s litigation status and reduce human interface to weed out corruption. Thus data in its many avatars – as a nexus for presence, as a source of revenue from digital business, as a privacy safeguard and as a taxpayer’s enabler, has been embedded across Budget 2020, perhaps as a harbinger of the pivotal rule to be borne by ‘data’ in the times to come.
- Tapati Ghose is Partner, Deloitte India and Anita Nair is a Senior Manager with Deloitte Haskins and Sells LLP.