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Budget 2018-19: Google, Facebook and others may have to pay more tax

BudgetBy Pallav Pradyumn Narang

It is fairly easy to do business online, Google and Facebook do not need local operations in each country where they operate. Netflix does not necessarily need an India office to serve Indian customers and Spotify, if it comes to India can just flick the switch online when they wish and be available to the Indian consumer without actually having to set up a local office or hire staff in India.

Governments world over are becoming more aware of the changing ground realities as far as business is concerned. They can see precious tax revenue being stashed in far-off countries such as Ireland while the company profits from operations in their own countries. It is therefore that Base Erosion and Profit sharing or BEPS has become a buzzword in tax circles worldwide. Anti BEPS measures work to ensure that companies cannot take advantage of differences in tax rules and move their profits to low or no tax jurisdictions. In this light, the honourable Finance Minister, Mr Arun Jailey, through Finance Bill-2018, has proposed to bring incomes earned by such IT companies from India by widening the definition of “business connection” in India.

What is a business connection?

Defined in detail here a business connection typically denotes situations wherein acts are performed for a non resident by residents therefore leading to a nexus with India for such incomes.

What changes Now?

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The definition of business connection has been updated to include “Significant economic presence” This has been defined as per the proposed bill as:

  1. Any transaction made by a non-resident, if the aggregate amount of transaction entered, exceeds such amount as may be prescribed. Further, the transaction may be in respect of goods, services, or any property. Provision of download of data or software in India has been expressly mentioned.
  2. Interacting with users or soliciting its business activities in India through digital means.

The definitions are al-encompassing and are bound to include behemoths such as Google, Facebook, Netflix, and Apple just as well as smaller companies doing business with India. The past decision to impose Equalisation Levy of 6% on foreign advertising, had also met with criticism. But, now the total incomes of these online giants have been brought into the Tax-Net.

These companies were hitherto not required to pay tax in India on monies earned from India and Indian consumers, this however can change if the government has its way.

What next?

In the short term, little will change. Foreign businesses will still be able to use Double Taxation Avoidance Agreements (DTAA) provisions and not have to pay tax in India. However, as the government has outlined in its memorandum, it will try to push to include such categorization in the respective DTAAs and make a case for taxation of such companies incomes originating from India in the longer term.

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