India Seeks Advice on Scope of New Law Taxing Digital Businesses

On 13 July 2018, India’s Central Board of Direct Taxes released a consultation seeking input on the implementation of a new addition to India’s tax law under which businesses doing digital business in India without a physical presence will nevertheless be taxable in that country.

The law in question is Explanation 2A of section 9(1)(i) of the 2018 Finance Act, which was passed earlier this year. Under that provision, “significant economic presence” will result in taxable “business presence” in India regardless of whether the taxpayer has any physical presence there. For reference, “significant Economic Presence” means:

“Any transaction in respect of any goods, services, or property carried out by a non-resident of India including provision of download or data or software in India if the aggregate of payments … during the previous year exceeds the amount as may be prescribed,” or “systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means.”

The new law therefore leaves it to the tax authorities to determine revenue thresholds for both physical goods or services, and the number of users that would amount to a significant economic presence.

Related: Inclusiveness & Protectionism: A Time to Pause & Rethink for India's IT Sector

The consultation is designed to solicit input as to those items. Comments are due by 10 August 2018.

The new Indian law joins a host of other efforts in other countries to come to grips with the increase in digital businesses, in which the business has no physical presence in a country but derives substantial profits there from customers or users. For example, the EU is considering similar provisions, and so is Canada.

Like Canada, but unlike the EU, the Indian provision seeks to tax not only services and intangibles, but also sales of physical goods in the country by means of the internet. 

Although the consultation seeks input on the thresholds noted above, it does not address how profits attributable to India would be determined, nor whether a business with the requisite number of customers in India but without the requisite revenue would nevertheless face taxation.

Related: India Provides Tax Relief for Start-ups

How This Impacts Mobility

Worldwide ERC® members who provide services in India (for example, to transferees) may face taxation there even if they do not have an office or employees in that country. Such companies will want to watch the implementation of this provision closely, and may want to provide input pursuant to the consultation. Although it is likely that revenue levels and numbers of customers will be set to ensnare larger businesses, that outcome is far from certain.

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