India has laid the foundation for taxing the income of foreign digital service companies to boost revenue and join the global move to end the practice of base erosion and profit-shifting typically used by multinational companies.
The 2018 Budget has proposed a new rule that indicates that a MNC can have a business connection in India despite not having a physical presence in the country.
Move To Benefit Local Digital Enterprises
Tax officials have said that the rule targets digital companies like Google and Facebook which are based overseas but provide digital services in India and also app developers having users in India,.
The measure intends to encourage Indian digital enterprises and provide a level playing field for them, apart from pushing foreign entities to set up shop here.
The measure comes in wake of the equalisation levy, called the Google tax ,being introduced in 2016, covering online advertising payments made to foreign entities with a permanent establishment in India.
Under this rule, such companies are required to pay 6% of the gross payments to the government and receive an equivalent deduction at the time of computing income for tax purposes.
When a company has a permanent establishment in India, tax is paid on its income, just as local companies do.
Companies Must Pay Tax Everywhere They Make Profit
A tax expert noted that companies selling digital goods or services having a taxable presence in India can be viewed as an alternative to the equalisation levy.
The new measure uses a principle highlighted by the OECD that every government possess the right to collect tax that is due on any value created in the economy and that companies are required to pay necessary tax in every market wherein they make a profit.
Foreign digital service companies which are based in countries having applicable tax treaties with India will not be affected, however India may have to renegotiate the tax pacts to include the proposed rule.
