In a bid to avoid tax avoidance by foreign-registered companies which generate income in India, the government has asked the tax department to look into the various contours and challenges for a comprehensive review.
Highly placed sources have told CNBC-TV18 that “various rounds of review meetings have started in both the direct and indirect tax wings of the revenue department to assess the impact and to review the current tax policy loopholes which lead to tax avoidance by such foreign companies.”
The move comes after the union finance minister Nirmala Sitharaman’s statement at the G20 finance ministers and central bank governors meeting in June at Fukuoka, Japan. Sitharaman had flagged serious issues relates to taxation and digital economy companies, and to curb tax avoidance and evasion.
Sitharaman had noted the urgency to fix the issue of determining the right nexus and profit allocation solution for taxing the profits made by digital economy companies.
"Appreciating the significant progress made under the taxation agenda including the Base Erosion and Profit Shifting (BEPS), tax challenges from digital economy and exchange of information under the aegis of G20, Sitharaman congratulated the Japanese Presidency for successfully carrying these tasks forward,” a finance ministry statement had said.
Sources further said, "Revenue department has asked the CBDT to review direct tax regime applicable to foreign companies that operate in India. And the central board of indirect tax and customs to look into the issues related to non-payment of Goods and Services Tax (GST) by foreign ecommerce companies doing business in India.”
The government feels that many foreign-registered companies generating business income in India avoid paying duties or the full extent of taxes through these tax policy loopholes.
Sitharaman had laid out a vision that the work on tax challenges arising from the digitalisation of the economy is entering a critical phase with an update to the G20, due next year.
In this respect, Sitharaman had strongly supported the potential solution based on the concept of ‘significant economic presence’ of businesses taking into account the evidence of their purposeful and sustained interaction with the economy of a country. India has already piloted a concept and it has been supported by a large number of countries including the G-24.
She expressed confidence that a consensus-based global solution, which should also be equitable and simple, would be reached by 2020. Sources further said that the task force on simplification of direct tax legislation is also likely to “layout modalities on taxing biz income of foreign companies originating in India.”
Already many Indian companies have approached the Central Board of Direct Taxes (CBDT) and Central Board of Indirect Taxes and Customs (CBIC) on invoicing of goods and services by India based foreign companies.
"LocalCircles has met with senior officials in the Government and shared the need for foreign companies with sizeable operations, revenues and profits in India to pay taxes in India”, said Sachin Taparia, founder and chairman, LocalCircles.
"We have proposed to the government that any foreign company, if it has more than 1 million users or 100 paying customers or over 10 crores of revenue in India must be required to invoice locally and pay taxes in India”, said Taparia
"Taxation of the digital economy is an important unresolved international tax issue globally. Currently, countries are adopting unilateral measures until the time a global consensus is reached. India has levied equivalisation levy. However, taxation of foreign companies having a significant economic presence is not raising revenue in the absence of amendment in the treaties. Consequently, profit attribution is also difficult to apply. Any measures adopted by Indus in the absence of global consensus would at best be unilateral measures which may have a negative effect. Expansion of the scope of the existing equalisation levy could be a better option," Amit Maheshwari, Partner, Ashok Maheshwary & Associates LLP said.