However, sources said that India’s suggestion – which were part of the G24 contribution to the exercise – will have to be considered before a final taxation framework is published by the end of next year. “No proposal on how to tax digital firms that earn revenue from jurisdictions, where they don’t have a permanent establishment in the conventional sense, can be finalised without India’s approval,” the official said. He added that India’s position was that profit distribution formula should be arrived at afresh and not be relied on transfer pricing methodology.
The government, however, agrees with the nexus rule, or tax presence, for digital companies as defined in the consultative paper. The paper said that the new nexus would not be dependent on physical presence but largely based on sales. The new nexus could have thresholds including country specific sales thresholds calibrated to ensure that jurisdictions with smaller economies can also benefit.
“India’s position is that the profits should be distributed into various locations on the basis of revenues as it would be fair as well as simple to operate and physical presence should matter little. However, OECD’s approach to distribute the profits of digital businesses first into ‘routine’ profits and then allocating the ‘residual’ profits would be complex and would accrue little tax revenues to jurisdiction other than their home countries,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates.
In the absence of global consensus on taxing digital companies transact business in a country without necessarily having any physical presence, the government in 2016 implemented an interim tax called equalisation levy to tax advertisement revenue.
A business entity advertising on Google or Facebook worth over Rs. 1 lakh in a year is required to withhold a 6% tax on the amount.
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