So have you watched all episodes of Sacred Games on Netflix yet? Maybe you are watching your favourite movie on Amazon Prime? Or perhaps busy streaming hours of music on YouTube?
Chances are that you are already doing all or most of the above. The global digital ecosystem is here. It has consumed most of us living in Indian metros and it’s exploding at lightning speed in cities and towns beyond.
The digital content and transaction revolution has translated into big money. Take a look at the astonishing rise of the FAANG (Facebook, Amazon, Apple, Netflix & Google) stocks on Wallstreet and you will know what I’m talking about. Now the rise of this new data driven economy is also raising its own challenges. How to tax the growing digital ecosystem is one such huge question before the governments around the world.
There is a no clear answer. The countries are deliberating, discussing and trying out various concepts and that’s where Central Board of Direct Taxes' (CBDT) July 13 notification comes into play, putting in motion the next steps that India intends to take to tax global digital companies like Netflix, Amazon and Google.
DIGITAL TAXATION: CONCEPT OF ‘SIGNIFICANT ECONOMIC PRESENCE’
At the heart of the debate is this fundamental question- If a non-resident company earns revenue by allowing Indian users to download its’ content or software, should it not pay tax on the portion of revenue it is generating in India?
The Indian government, like many of its counterparts, certainly thinks so. Which is why it introduced the concept of ‘Significant Economic Presence’ or SEP in the Finance Act 2018. The concept is simple- a company may not be based in India but if it has significant economic presence then it is liable to pay tax to the Indian exchequer.
SO WHAT CONSTITUTES ‘SIGNIFICANT ECONOMIC PRESENCE’?
According to Finance Act 2018, a non-resident entity will be deemed to have SEP, if either one or both of the following conditions are satisfied:
1) If revenue generated by the physical transaction or download of data/software exceeds a prescribed amount
2) If a non-resident company is soliciting business by engaging with a certain number of users in India
It is these thresholds that the government is now looking to define. The CBDT has given stakeholders time till August 10 to give feed back on the issue i.e – above what revenue cut off limit should a non-resident company be liable to pay tax in India? And what is the appropriate number of users above which a foreign digital /tech company is said to have SEP and thus are subject to taxes in India.
TAXING THE DIGITAL ECO-SYSTEM: GLOBAL MOVES
India’s move comes at a very interesting time when governments around the world are grappling with similar questions on taxing the booming digital universe. OECD’s BEPS (Base Erosion Profit Shifting) project hasn’t yet laid out any clear rules on the subject. BEPS is an international tax framework which comprises of over 100 member countries. Protocols on taxing digital companies are still evolving.
Meanwhile, the EU is toying with the idea of levying a 3 percent tax on digital revenue generated in the source country. Again, this is all under discussion and getting multiple countries to agree on a uniform protocol is easier said than done. That brings us back to India.
INDIA’S ‘GOOGLE TAX’: THE EQUALISATION LEVY
India took its first step in taxing the digital ecosystem in 2016 by introducing the equalisation levy. This is a type of withholding tax levied by the advertiser on the advertising payment it makes to a digital company or social media platform. The current rate of this levy is 6 percent.
According to Girish Vanvari, founder, Transaction Square, India has still not taxed the direct revenue that companies like Netflix or Amazon are generating in the country. “Equalisation levy taxes the ad revenue and back office or marketing operations of global tech giants are liable to tax. But actual revenue including subscriptions is still not being taxed in India,” said Vanvari.
There is also the issue of tax treaties that India has signed with many countries including the United States. Experts say global tech giants are likely to seek refuge behind these treaties and challenge the levy of any digital tax by India.
“Given that a tax payer has an option to be governed by the provisions of Indian tax laws or the treaty, whichever may be beneficial, the tax payer will opt for the treaty benefit so as to not create a taxable presence in India” Himanshu Parekh, head of international tax at KPMG said.
Experts tracking the digital ecosystem agree that a digital tax code is bound to become a reality given the huge growth this sector is witnessing.
The question is what form will it take and whether India will be able to strike a balance between protecting its revenue interest and allowing its citizens access to the best of global digital content & innovation.