OPINION: These tech issues need clarity and amendments

By Deepa Bakhru and Smriti Gangwal

The pace of digitalisation in business activities in India has been a testimony to the tremendous potential of digital transformation. Moreover, with the outbreak of COVID-19, most business operations moved online, accelerating a digital transformation that has been underway for decades.

Today, technology is commonly interwoven into every business function. Companies globally, including in India, are increasing investments on data management and standardisation, artificial intelligence and shifting of applications and infrastructure to the cloud.

Moreover, the Indian government is also increasingly putting digital strategies at the centre of its policy agendas. There has been a paradigm shift in the mechanism of filing tax returns from manual to e-filing, introduction of GST, faceless assessment and appeal, etc. Also, the Income-tax department has revamped the income tax portal to provide several new features for ease of compliance.

The tech industry is eyeing the forthcoming Budget in order to get clarifications on digital taxation to resolve ambiguities in various laws around it. Some of the key expectations of the tech industry from the upcoming Budget 2022, are enumerated as under:

• Presently, there is an ambiguity in relation to the scope of equalisation levy (EQL)provisions, for instance, digital/electronic facilities could be held to cover any communication by way of emails or calls or any other means using the internet. Further, Indian tax treaties do not support the claim of credit of EQL in case of non-residents, in its home country. Therefore, the government needs to provide clarity in terms of scope of EQL and introduce a mechanism for claiming credit of EQL paid by non-residents in the home country. Additionally, a mechanism needs to be introduced for claiming refund/adjustment of excess EQL deposited by the e-commerce operator.

• Significant Economic Presence (SEP) has significantly widened the scope of the term ‘business connection’ with the thresholdsbeing prescribed. Though SEP was introduced to tax digital transactions, based on the wordings of the provisions, it may include physical transactions in its ambit. Further, considering the broad coverage of SEP and EQL, there is an overlap of the transactions covered under both regimes. There could also be tax deducted at source (TDS) impact in case the same is being considered as royalty or fees for technical services (FTS), in case of non-resident taxpayers. The government needs to clarify on the coverage of SEP along with the interplay between SEP, EQL and TDS provisions. Further, clear profit attribution rules also need to be introduced.

• Likewise, clarity is also required on the applicability of EQL/TDS provisions on cloud-based transactions which is currently uncertain due to the contrary positions adopted by taxpayers and tax authorities.

• Relevant amendments are required to be made in the Act to provide clarity on final Pillar provisions including the consequent abolishment of SEP and EQL.

• Recently, there has been an increase in data centre activities being undertaken by captive units in India and with the introduction of data localisation regulations, there has been a surge in the number of data centres being set up in India. Tax authorities have been considering such operations as activities constituting PE for non-residents. Clarifications need to be provided to put an end to the prolonged litigation.

• The tech industry incurs heavy advertising, marketing and promotion (AMP) expenditure for promoting their products which are being considered as capital in nature, leading to additions including transfer pricing adjustments. Clarifications in the tax treatment of AMP expenses is required around the said issue.
  

Additionally, taxpayers also seek the following policy interventions:

• Refund of input tax credit on capital goods should be permitted;
  
• Mix of panel members (including independent members) in dispute resolution panel (DRP)should be introduced for better evaluation of merits of each case; and
  
• Time limits for conclusion of appeals by Commissioner of Income (Appeals) [CIT(A)] and Income Tax Appellate Tribunal (ITAT) should be prescribed.

Conclusion

India’s tax regime is being geared up to cover newer tech business models. However, the overlapping of certain provisions and lack of clarity leads to interpretational, administrative and operational challenges to taxpayers. Accordingly, taxpayers are looking forward to clarifications to resolve such ambiguities.

Deepa Bakhru is Senior Manager and Smriti Gangwal is Manager with Deloitte Haskins and Sells LLP

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