With everyone’s eyes on the upcoming Union Budget 2021, the big expectation is how the Budget 2021 will set the course for economic recovery after the Covid-19 pandemic impact. Technology has been one of the few sectors to show resilience, and the Covid-19 pandemic has been a catalyst for technology and digital adoption across sectors. India has been one of the biggest and fastest-growing digital markets in the world. The number of internet subscribers in India currently stands at around 740 million, making India rank second globally on internet usage. Further, it is expected that 60% of the population would use the internet by 2022 making India one of the largest and fastest-growing digital economies in the world, expected to reach $1 trillion digital economy by 2025. Technology has brought in a fundamental change in the way businesses work today, the mode of communication with their consumers, the mode of sale and provision of services, payment for the goods and services, etc.
Given the role of the technology sector in the growth of Digital India, it is expected that the government may implement effective and favorable policies, in creating the digital infrastructure and the ecosystem to support innovation. The backbone of Digital India could well be the Data Centre and Cloud services, supporting the fast-growing digital economy. While it is important to bring necessary regulatory interventions including necessary data protection guidelines, it would also be necessary to accelerate investment in these sectors by policy measures such as providing infrastructure status to data centers, promote robust connectivity, etc.
Similarly, incentivising research and development of next-gen technologies such as artificial intelligence, machine learning, robotics, etc. could help leverage India’s cost-effective science and engineering talent to build our strategic capabilities in core scientific and industrial research, and also act as a multiplier for the broader economy.
In the context of the above, there are specific expectations of the industry relating to greater consistency and clarity on tax-related regulations, the key ones are articulated below:
Clarity on Digital tax –The newly introduced Digital Tax called the Equalisation Levy (EQL) is a unilateral measure by India arising from the base erosion and profit shifting initiative. The Information Technology (IT) and ecommerce industry being the most impacted industry still awaits clarity on a host of issues such as:
- Scope of levy – Currently, various terms like ‘digital facility’, ‘electronic facility’ ‘platform’ which are not clearly defined in the law leads to the EQL being applicable on even one-to-one transactions and intra group services. A clarity that EQL should apply only to revenue arising from use of mediums for third party/ mass communications would be really helpful.
- Double taxation – The country of residence of the foreign entities paying EQL in India may not give credit for the EQL as it is not in the nature of income tax. A clarification that EQL is in the nature of additional income tax would be welcome as it would enable these foreign entities to claim a credit of the EQL against the tax paid in their country. Thereby eliminating double taxation.
Applicability of Significant Economic Presence provisions: Applicable from 1 April 2021, foreign entities earning income from users in India or data collected from users in India without any physical presence in India would be subject to tax in India under the Significant Economic Presence (SEP) provisions. There is an evident overlap between SEP provisions, withholding tax provisions, and EQL provisions. Further, the thresholds, which were to be prescribed for applicability of SEP provisions, have not been notified till date. Given there is still so much ambiguity in the said provisions, in the upcoming Budget, the government could either provide clarity on the applicability of SEP provisions or consider deferring its applicability until the provisions are clear and thresholds fixed.
Clarity on withholding tax for Cloud computing: Applicability of withholding tax on cloud-based transactions pursuant to its treatment as fees for technical services/ royalty has emerged as litigative issue in India. Given that Indian cloud service providers are yet to mark their foot in this sector, the non-resident service providers are facing the heat of litigation due to contrary stands adopted by taxpayers and the tax authorities. We hope the government provides some clarity in this Budget on the applicability of withholding tax provisions on cloud-based transactions.
Allowances for pandemic related expenses: This year has seen corporates (particularly IT/ IT enabled Services companies) rework their operations to allow its employees to work from home/ anywhere. This entailed corporates giving various allowances to its workforce to ensure that the work is carried out smoothly and without hindrance. However, the government has not given any concessions to reduce the tax impact of such payments to the employees. It would be a welcome step to give certain exemptions/ deductions for such expenses.
Advertisement, Marketing and Promotion (AMP) expenditure
In recent times, it is become at most important for e-commerce players to spend huge funds for promoting their business. Though the benefits from this AMP expenditure are short-lived and do not provide enduring benefits, the tax authorities treat them as capital in nature and do not allow deduction on the same. The ask from the government is to clarify the tax treatment of AMP expenditure.
Relaxation in the methodology of computing arm’s length range (ALR)
In the given economic slowdown, it may not be fair for the companies to show similar operating margins as in the past years. Accordingly, it is important that specific relaxations are made available for computation of ALR and also clarity is given on the kind of documentation to be maintained by corporates in this unprecedented year to demonstrate the impact on its margin.
By Pramod Bagri, Partner, and PN Sudarshan, Partner, Deloitte India