The government has cast the net in the Union budget to tax top global internet companies. It has inserted an enabling provision to tax the Indian income of global digital majors on the basis of data collected from India.
This is different from the provisions introduced through the Finance Act of 2018, which proposed to use 'significant economic presence' as a nexus to tax profits. However, those provisions did not specify the thresholds for application.
This year's budget proposed to replace that mechanism with data collection as the basis. The proposed rule will lead to a tax on revenue from targeted advertisements to Indian customers, sale of data collected from India and sale of goods and services using data collected from India.
However, this provision will be overridden by tax treaties, once the Organisation for Economic Co-operation and Development (OECD) negotiations on this issue conclude, which is expected to happen by the end of 2020.
Explaining the details of the proposed rules, Akhilesh Ranjan, a former member of CBDT and Head-Task Force of Direct Taxes, said, “India had always believed that the right way of taxing the internet companies or the digital services was by defining an alternative nexus called the significant economic presence.”
Ranjan pointed out that the value of data has been realised all over the world. "We have now brought in provisions which state that if data generated from Indians is exploited commercially, anywhere, in any part of the world, then that company or enterprise which is exploiting that data will have to pay some amount of tax in India attributable to that data. That is the importance of the amendments,” he said.
Supreme Court lawyer and cyber law expert NS Nappinai noted that the categories that are being put forth would use the IP address as the basis for taxation. "So the IP address decides the locality or the location in India. It is also linked to three different aspects. One, if you advertise here; two, if you are selling data pertaining to residents of India, and three, if you are selling goods and services based on data collected about residents in India,” she said.
“The personal data protection bill which is on the anvil will have priority in terms of how data should be treated. Merely because an MNC is going to pay tax on data will not justify any kind of action with respect to that data,” she added.