Digital players in the country like Google, Facebook and mobile application service providers will be required to pay taxes in India on the income generated from Indian consumers even if the infrastructure is located abroad. A new proposal in the Finance Bill is applicable to entities involved in digital transactions. These entities will be considered to have significant economic presence in the country whether or not they have a residence or place of business in India. The government has not yet defined what will constitute “significant economic presence”.

This rule will impact entities that do not have a physical presence in India but sell products and services through the digital mode. There are many instances of developers of applications which are actively downloaded by Indians residing abroad. They will now be liable to pay tax in India if they are deemed to have significant economic presence.

The rule will have an impact on companies like Google which have a physical presence in India but have their infrastructure located abroad. In a recent rule by the Income Tax Appellate Tribunal, it was clarified that the payments made by Google India Private Ltd to Google Ireland Ltd for the purchase of ad space on Google will be considered as a royalty. Any payment for royalty is subject to tax in India and Google India held that this amount will be considered as business income in the hands of Google Ireland.

This allows the Centre to tax the transactions in respect of any products or services and property carried out by non-resident Indians. This includes the provision of data or software in the country and soliciting of the business activities through digital means. It is also proposed to provide that the transactions will constitute significant economic presence in the country whether or not the nonresident has a place of business in India or renders services in India. The amendment will be effective from 1st April 2019 and will apply from assessment year 2019-20 and the subsequent years.

The rule could generate higher tax litigation and it is in line with the Base Erosion and Profit Shifting treaty that aims to target companies which exploit gaps in tax rules of different countries in order to shift profits to low or no tax locations.  

India is a signatory to the treaty under which any company which has its base in any of the BEPS signatory country will have to pay taxes in India if it has significant economic activities in India. This proposal implies that companies which do not have a base in the BEPS signatory country will be equally liable to tax in India due to the defined law.