The taxing issue of making the tech giants pay their due

Information Technology has lowered barriers for trading without physical presence in a region. Historically, countries have sought to tax businesses conducted within their territories. This has been shaken up by the blistering pace of the internet.

Global e-commerce retail sales rose 265 per cent between 2014 ($1.3 trillion) and 2021 ($4.9 trillion). Nations with substantial markets have felt the need to recognise and address the tax imbalance (which the pandemic has exacerbated).

For, after all, it is their population that contributes to the coffers of the technology companies, most of which are located in the developed nations, where they pay their taxes.

‘Digital tax challenges’

The Organisation for Economic Cooperation and Development (OECD)’s concerted efforts gave birth to BEPS Action-1 in 2015, addressing the “Tax Challenges Arising from Digitalisation”, suggesting taxation of cross-border digital transactions from three points: Nexus based on Significant Economic Presence (‘SEP’); withholding tax on digital transactions; and equalisation levy.

Initially, India went for the equalisation levy as a separate chapter in the Finance Act, 2016 at the rate of 6 per cent of gross consideration on services which broadly covered the digital advertising space.

Effective April 1, 2020, e-commerce companies came within the ambit of the equalisation levy with a flat 2 per cent charge on gross revenues (both goods and services) of non-resident e-commerce operators (including providers of online trading platforms, advertisements targeting Indian customers and dealing in data of Indian origin).

Significant Economic Presence

In May 2021 (effective April 1, 2021), India operationalised the SEP for non-resident e-commerce companies by including ‘download of data or software’ worth revenues exceeding ₹2 crore from Indians or a threshold of 3 lakh Indian users with whom such companies ‘solicit systematic and continuous business activities or engage in interaction’.

Until recently, Indian tax courts have almost consistently held the view that payments to non-resident companies for online advertisement campaigns (Income Tax Appellate Tribunal, Kolkata in the Right Florists case) or banner ads on portals (Mumbai Tribunal in Pinstorm Technologies) to expand business prospects were not liable for taxation in India, especially in the absence of an Indian Permanent Establishment, effectively taking them out of the ambit of Indian tax.

The question of violating the tax treaties in case of equalisation levy may not arise since it has been brought in via Finance Act, 2016 and not by amending the Income-tax Act, 1961 (‘the Act’).

Though the introduction of SEP came by way of amendment to the Act, the definition of ‘permanent establishment’ used in the tax treaties has not yet been amended and therefore, until that is done, the Indian taxman cannot yet tax such global technology giants. SEP terms such as ‘systematic and continuous soliciting of business’ or ‘engaging in interactions’ have not been defined, which is a sure-shot invitation to increased litigation.

We also have to consider how tax authorities will gather the data required to implement SEP, let alone verifying it. Like other countries, India is attempting to get a fair share of the tax pie of profits earned by tech giants like Google, Facebook, Amazon, and Microsoft.

However, the fear is of retaliatory, punitive tariffs, as has happened to France. In the absence of a multilateral tax body transcending national self-interests, global digital and e-commerce business is poised for turbulent headwinds.

(The author is a Partner, Bhuta Shah Co. LLP)

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