Companies like Google, Facebook and Twitter, among others do not pay tax on income generated locally, including that from advertising revenue, as they do not have permanent establishments. But, that’s going to change soon.
To date, foreign-owned internet companies including Google, Facebook and Twitter have not paid any tax on their income they generate in India, especially from advertising as a revenue stream. This was so primarily because there was no law to bring them under the tax net.
This is going to change soon. The Indian government is finalising a framework that will make non-resident internet companies pay direct taxes on profits earned locally, beyond a limit. The Indian government is following the concept of ‘Significant Economic Presence’, introduced in the Budget last year, which specified the limit.
According to a report by the Economic Times, the government is looking to set the threshold at Rs 20 crore revenue and 500,000 users. Local technology players, however, wants a lower limit. In a letter to the Finance Ministry on July 29, LocalCircles recommended the threshold to be set at Rs 10 crore revenue. It has also suggested that global tech players with 1 million registered users and 100 paying customers should be made to invoice in India.
This is a key point. Global internet companies, including Google, Facebook and Twitter, have so far been majorly invoicing its India advertisers through their Ireland entities, despite the fact that the payment happens in Indian currency. The issue was flagged off by Business Standard on March 12, 2015.
But why do these companies invoice through foreign entities – even not through parent companies – while they have their registered entities in India? That is because they claim not to have any permanent establishment, or servers, which in turn allows them to avoid India’s tax net. The Indian entity is shown as a marketing outfit or provider of specific services.
To be sure, none of the internet companies are at fault. They made use of the loopholes in the law. Besides, India’s legal authorities did allow them not to pay taxes. In April 2013, the Income-Tax Appellate Tribunal in Kolkata had passed an order (in an appeal filed by Right Florist Pvt Ltd) stating that payments to websites like Google and Yahoo for online advertisements were not liable to tax in India as those could not be brought under the purview of permanent establishment (PE) provisions of the Income Tax Act, and their incomes should be taxed in countries where their servers are located.
What took Indian government so long to come out with a possible solution? While the reasons cannot be specifically ascertained, the government, as the Business Standard article pointed out, did not know what to do, and it did not even had any idea of notional loss to the exchequer.
Interestingly, India isn’t the first country to tax foreign-funded internet companies. France has already imposed a 3 percent tax on sales generated in France by global technology companies like Google and Facebook, despite accusations by the US that it was “unfairly” targeting American companies. Last month, G-20 finance ministers have agreed to finalise rules on digital taxes for global technology companies like Google and Facebook by 2020.
India may be just following the trend when economies across the world are up for taxing global technology companies on local earnings, but it needs to act now before it is too late.
