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India Getting ready to Tax on Digital Transactions & Income from India source Data

A: Introduction

India is leading developing Countries at Global forum OECD/G20 to corner the developed countries to achieve consensus on ‘Digital Tax’. BEPS Action Plan-1: Tax Challenges Arising from Digitalisation to address issues raised by digitalisation of the economy to develop a consensus based solutions by end of 2020. As a preparatory measure, this year budget proposal includes multiple provisions to tax Indian source income from digital economy and to align domestic tax laws to achieve synchronization with BEPS plans and reduce tax litigation in International Tax.

B: Decoding Important Proposals on International Tax-Budget 2020

  1. Seeks to amend Section-6 of ITA to enlarge the scope of taxation for Indian Citizen or persons of Indian origin who are non-residents with the objective to tax its citizen if they are not liable to pay tax in any other tax jurisdiction. The amendment will apply from AY 2021-22.
  2. Seeks to amend Section-9 of ITA to defer the applicability of Significant Economic Presence (SEP) for one year in view of waiting for the consensus of International community at OECD/G20 forum, as incorporated by finance Act 2018 (to be implemented w.e.f. 1.4.2021) to enlarge the scope of business connection to tax e-commerce transactions .
    • The Scope of SEP is further enhanced based on 2 tests: The amendment will apply from AY 2022-23.
    • Test-1: If the non-resident undertakes any transaction in respect of any goods, services or property carried out by him with any person in India, including provision of download of data or software in India and if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed.
    • Test-2: If there is systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed.
    • Also seeks to add new explanation 3A in Section-9(1) of ITA to clarify that the income (to cover income from advertisements and data related revenues) attribution to the operation carried out in India by non-resident as referred in Expl. 1 of Section-9(1) of ITA shall include income from Indian operations. Following income will be considered as income from India operations:
      • such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India;
      • sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India; and
      • sale of goods or services using data collected from a person who resides in India or from a person who uses internet protocol address located in India.
  • The main objective of amending Secion-9 of ITA is to Tax on Digital Transactions of e-commerce companies like google, Facebook Netflix etc. under the domestic laws but unless the SEP concept is incorporated in the DTAAs, SEP in the ITA will be inoperative. This is because DTAA overrides the ITA.

3   Seeks to amend Explanation 2 of Section-9(1)(vi) to enhance the definition of term Royalty to include consideration received from the sale, distribution or exhibition of cinematographic films to align the definition with most of the treaties. This further helps to Tax on Digital Transactions.

4   Seeks to amend Section 94B (this provision is a part of BEPS Action Plan-4 of OECD/G20 of which India is an active participant) of ITA so as to exclude in its ambit the branches of foreign banks operating in India as they are already paying higher tax applicable to foreign companies while this section is meant for the domestic companies. The amendment will apply from AY 2021-22.

There are two preventive litigation mechanism in transfer pricing provision; one, safe harbour rule (S-92CB) and second, Advance Pricing arrangement (APA) (S-92CC) to arrive at arm length price for international transaction between associated enterprises. Both these mechanism also made available to calculate profit attribution to a PE in India being a most limitative area of recent times. The amendment will apply from AY 2020-21.

6   Seeks to amend Section-90 and 90A of the ITA to align the provisions of these sections with the BEPS action plan-6 on treaty abuse which is minimum standard so as to include in preamble in the DTAs stating that the DTA is for avoiding double taxation “without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory)”. The same phrase is now being added in Section-90 and 90A. The amendment will apply from AY 2021-22.

7   Seeks to amend Section-115A (5)whereby non-residents are not required to file return of income in India if there are receiving only interest or dividend income if tax has been deducted from source from such income. Now this relief is further extended to income in the nature of Royalty and FTS and tax has been deducted at source as per S-115A (1).The amendment will apply from AY 2020-21.

C: Way Forward

There are lot of developments happening at extremely fast pace at International arena, we need to be very sure that our domestic tax laws already incorporate all the expected tax reforms as we are now leading to most of the developing countries at global forum to Tax on Digital Transactions.

(Disclaimer: This content is meant for our clients or professional friends only for stimulating discussion on the subject matter not to frame any commercial opinion. All efforts are made to compile correctly with no guarantee of extreme accuracy)

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