Advancement in computing power and technology along with explosive growth in the consumption of data has in the past few years enabled businesses to take to digital platform and deliver goods and services remotely. This has disrupted conventional business models and has enabled digital corporations to serve customers in markets where they need not have any physical presence. The emergence of a digital economy has challenged the foundation of taxation based on a nexus between income generation and physical presence. India has taken the lead in tackling this and in shaping a global regime for taxation of digital economy by introducing the concept of “significant economic presence” as the basis for taxing income that offshore firms make by way of remotely delivered goods and services.
Consumption pattern
The reliance on internet for delivery of goods and services has influenced transactions across sectors. Television broadcasting, for example, is facing challenge from online content providers such as Netflix. The video streaming company with about 125 million global subscribers believes its next 100 million customers will come from India. To make the tax regime catch up with the innovation in supply of goods and services, India adopted the concept of ‘significant economic presence’ in Union Budget 2018-19. It seeks to address the tax regime’s shortcomings in tapping income that businesses generate in markets where they have little physical presence. In response to an email regarding the budget proposal, Netflix informed that it has “a taxable entity in India and pay all taxes where required by law.” The company, however, did not go into details.
‘Significant economic presence’ concept
When a business supplies goods and services in another country where it is not a resident, national tax laws and tax treaties allow that country to tax the profits that may be attributable to the operations in that country. The basis of such taxability is its “fixed place of business” or “permanent establishment (PE)” in parlance of tax treaties. However, the definitions of such a business connection with the local economy in terms of a fixed place of business does not exist in the case of remotely or digitally delivered goods and services. Adopting a 2015 proposal the Organisation for Economic Co-operation and Development made in its action plan to check the erosion of tax base of nations, India introduced the concept of “significant economic presence” which will establish the nexus between remote and digital engagement of non-resident businesses with Indian consumers, providing a basis for taxation of the resulting income.
Implementation
To tax the business profits from consumers derived by offshore digital enterprises, the budget proposed that the number of Indian users of such enterprise as well as a revenue threshold will be used. These parameters, however, have to be firmed up in consultation with the industry. For this, the Central Board of Direct Taxes invited views last month. India also needs to get the concept of significant economic presence its tax treaties with other countries. The government is preparing for this.