Feb 20 2020
The digital advertising industry which was valued at US$1.93 billion in 2019 is estimated to grow at a CAGR of 27.42% to reach US$8.25 billion by 2025, as per the recently released DAN e4m report. Much of the growth is driven by the penetration of smartphones which are largely sold online.
The challenge will reside at an implementation level.
Digital Economy in the case of Residents
To tackle the leakage of tax due to e-commerce transactions, the Budget proposes a new levy of 1% TDS (tax deducted at source) on e-commerce transactions, to take effect from April 1, 2020.
“In order to widen and deepen the tax net by bringing participants of e-commerce (sellers) within tax net, it is proposed to insert a new section 194-O in the Act so as to provide for a new levy of TDS at the rate of one per cent,” according to Budget 2020-21 documents.
This amendment is likely to significantly impact the compliance burden of companies like Amazon, Flipkart, Uber, UberEats, Ola, Swiggy and Zomato, who provide platforms to large number of small vendors to sell goods/service via their platform. Uber is already facing litigation in India for deduction of tax at source from their payments to Indian Drivers. Uber is contending that the payer is a non resident outside India and he is not obliged to comply with India tax deduction law.
As to the Budget proposal, Amazon India and Flipkart are studying the Budget proposal on levy of 1% TDS and will reach out to the government for clarifications. “We are studying the details, particularly how it impacts the MSMEs and Sellers on our marketplace platform. We will discuss further with our seller partners and engage with government and other stakeholders in due course,” Flipkart said in its response.
Digital Economy & Significant Economic Presence in the case of Non Residents
An amendment to the deeming provision for taxation of nonresidents (Section 9(1)(i)) was inserted vide Finance Act, 2018 which provided that digital transactions relating to goods, services or property undertaken in India by a nonresident or systematic and continuous soliciting of business shall constitute “significant economic presence” (SEP) in India, irrespective of the situs of the nonresident or place of provision of service. The basis for taxation of such digital transactions was limited to income attributable to India.
This provision has remained dormant as the tax administration never issued any rules governing the mechanism to tax such digital transactions. The legislation specifies when a foreign
enterprise is considered to have an SEP and, therefore, a business connection in India. This expands the scope of taxation of digital transactions under domestic law, so that transactions or activities may give rise to an SEP (and, hence, be taxable in India), regardless of whether the nonresident has a place of residence or place of business in India, or renders services in India.
Since the discussions on addressing the tax challenges of digitalization remain ongoing as part of the G20/OECD BEPS project, and a further report is not expected until December 2020, the implementation of the SEP provisions is proposed to be deferred to 1 April 2021 (i.e., financial year (FY) 2021/22). Apart from deferring the applicability of SEP, the Budget has proposed to tax certain new business models such as advertisements targeting Indian customers or sale of data collected from India.
Enlarging the scope of income attributable to operations carried out in India
Under the existing provisions only that part of income arising to a non-resident from ‘business connection in India’ is taxable which can be attributed to its operations in India. In order to bring profits of international digital companies deriving profits from digital transactions in India in the tax net, the Finance Bill 2020 proposes to define ‘income attributable to operations carried out in India’, to include incomes from :-
(i) advertisement which targets a customer who resides in India or accesses the advertisement through internet protocol address located in India;
(ii) sale of data collected from a person who resides in India or uses internet protocol address located in India; and
(iii) sale of goods or services using data collected from a person who resides in India or uses internet protocol address located in India.
This amendment will take effect from 1st April 2021. In respect of tax residents of the countries with which India has entered into a tax treaty, this amendment will be subject to the provisions of the relevant treaty.
While India chose to adopt a path to impose taxation now pending the outcome of BEPS project of G20/ OECD, other countries have also started taxation without waiting for the outcome of G20/ OECD report.
Digital economy and GST in India
In India digital economy was subject to GST. Earlier they were subject to service tax and post July 2017, they were brought under GST @ 18% with input tax credit. Following electronics services are subject to GST.
· Streaming/downloads of music, e-books, films etc.;
· Cloud-based or downloadable software;
· Membership fees to online sites, dating portals etc.
· Online gambling services
· Online advertising
As regards non-residents, India introduced equalization levy which ispopularly referred as ‘Google tax’. While digital services were subject to GST, slae of goods in digital platform continued to attract GST at e-commerce participant level.
While this is the position in India with respect to Digital Economy, Other countries also try their best to tax digital economy both inland and cross border. While the list of countries attempting digital tax goes on, in this article only one country is selected to provide comparative analysis. The country is Spain.
Digital taxation in Spain
The Spanish government is engaged in international discussions to address the tax challenges of the digital economy but the government also maintains that the new tax is needed because the current international income tax regime applicable to multinational companies results in under taxation. The reality is that the tax must be approved now, before the budget is approved, due to the need for increased revenues.
Also, for the moment, it is unclear what the effective date of the controversial new tax obligation will be. If the OECD reaches a deal by the end of 2020, then Spain´s unilateral tax would not be applied at all, but If there is no multilateral agreement by then, Spain will collect the tax at the end of the year. The question is if the payment is delayed, the Spanish government will need to find other revenue for funding public spending.
Spain’s digital tax
Spain’s digital services tax is largely based on a similar proposal floated by the EU in March 2018 which has not been yet approved by the Member States. The new tax is an indirect tax, compatible with VAT. The tax rate applied will be 3% of gross revenues (without deduction of any expenses) from digital services.
The digital service tax is focused on the services rendered, regardless of the providers’ feature. Like the EU proposal, Spain’s digital services tax does not tax all digital services—only those in which the user’s role in value creation is considered essential.
The revenues subject to Spain’s digital services tax are those from three main types of services: selling online advertising space, digital intermediary activities, and the sale of data generated from user-provided information.
Online advertisement
Online advertisement is within the scope of the Spanish digital services tax when the user´s device on which the advertising appears is located in Spain.
In line with the EU proposal, the bill establishes that a digital interface means any software, including a website or a part thereof and applications, including mobile applications, that is accessible by users.
Online intermediation
Digital intermediary activities subject to Spain’s digital services tax are those that allow users to interact with other users and which can facilitate the sale of goods and services between them.
Such activities would fall under the Spanish digital services tax when the underlying transaction takes place through a digital interface using a device located in Spain or the user’s account is opened with a device located in Spain.
Data transfer
Data transfer is subject to the Spanish digital services tax when the data transferred is generated by a user through a digital interface using a device located in Spain
As mentioned, the nexus for attributing taxation rights to Spain is based on the location of the user’s device. A controversial aspect of the new law is that it establishes a legal presumption that the location of any digital device corresponds to IP address. In other words, if the IP address is located in Spain, it is assumed the digital service is provided from Spain unless other proof is provided. In line with the EU proposal, Spain’s digital services tax lists a series of cases out of the scope of the digital services tax and, therefore, not subject to tax. The Spanish digital services tax is expressly intended not to apply to certain activities, including financial intermediation and crowd-funding.
Flip side of Digital Taxation
A unilateral digital services tax could result in double taxation, particularly when charged on revenues which are already subject to corporate income tax in a particular jurisdiction.
Conclusion
Whether in India or in Spain, digital tax is imminent. The State is anxious to collect revenue albeit the conclusion of G20/ OECD BEPS project.