There has been a lot of controversy between the Information Technology (IT) Ministry and Top US-based Social Media Giant like Google, Facebook , Twitter and others.
As these companies appoint nodal officers to comply with the new information technology (IT) rules, they could see their domestic tax bills jump from this year onwards. This is as per experts’ understanding of the new law and situation. These top digital companies do not have a presence or permanent establishment (PE) in India snd hence do not pay domestic taxes on their entire income. The Indian govt introduced the equalization levy- 6% on advertising revenue and 2% on digital transactions- to capture the domestic income of these companies. The companies pay tax on a ‘cost-plus basis’ on about 8-10% of total revenue, similar to an outsourcing unit in India.
This could change from this year. The tax department should argue that appointing a nodal or compliance officer in India under the new law implies the company has a permanent establishment in India, and therefore they should therefore pay the appropriate taxes-at least 25%, but possibly as much as 42% on the entire revenue generated in the country.
Over the last few weeks, these digital giants have been reaching out to their tax lawyers and advisors seeking a way in this matter. Earlier these companies were looking out to create structures to circumvent this tax impact. They had been looking to outsource compliance functions but that has been disallowed. They have been clearly told that the nodal officer has to be part of the US entity or a separate unit, and neither can this function to be outsourced nor they can hire anyone on a temporary or consulting basis.
PE is a concept in taxation that determines which country has the right to tax a multinational’s income and to what extent. These companies have offices in India but as per tax regulations, it does not bring the entire money made in India under the tax net due to various structures under which they operate. In most cases, income tax is paid by Indian entity, which can be typically defined as captive and only charges fees or margins from the foreign subsidiary. Tax is merely levied on fees charged by the Indian entity.
Experts say this requirement of appointing nodal or compliance officer would lead to the companies having a permanent establishment in India, and will have a huge tax impact from paying 6% equalisation levy to paying about a higher tax on entire income. Also some of these companies are already litigating the PE aspect in Indian aspects, even that could have a larger inpact. The companies should expect tax demands propping up on this basis.
As per legal minds, these companies might take refuge by stating ‘ that any compliance that’s mandated by the govt does not create a PE for us, because we do not require these functions to operate smoothly. The only reason why we have these functions here is because we have been forced to have them by Indian govt.’
In my opinion as a layman, these giants if they had started their Indian operations by creating a Indian subsidiary, then that would have been taxed by as the income tax laws. But by opening their office in India, and doing the business which ideally would been done by a subsidiary company, and by doing this they are only paying equalisation levy and getting away with. Now compant can not take a stand that this is newly introduced law and we entered Indian market this law was not there. But they are forgetting the fact that when you operate in other country, you have to adhere by that country’s law. These US giants think they have become so big by creating Social media market that they are above any law as they can create negative publicity for any govt thru social media.
Let us wait and watch on further development on this issue.
Waiting for your views on this matter.
Anil Malik
Mumbai, India
21st June 2021v
Tejinder Singh Sethi
Law of the land is “supreme” and the company to abide by them.