Top internet firms do not have a physical presence in India and so they do not pay domestic taxes on their whole profits. Now Google, Twitter, and Facebook have complied with the new Information Technology (IT) rules and also have appointed nodal officers. So from now onwards increase in their domestic tax payments could be noticed starting this year, according to sources.
In order to collect these firms’ domestic revenues, the Indian government imposed an equalization charge of 6% on advertising revenue and 2% on digital transactions. Similar to an outsourced unit in India, the firms pay tax on a ‘cost-plus basis’ of about 8-10% of total sales.
This may seem to change this year. According to the analysts, there is an argument from the tax department that under the new rules by hiring a nodal or compliance officer, means that the firm has a permanent base in India. And they should pay the proper taxes on any revenue earned in the country which should be at least 25% but maybe as high as 42%.
The internet behemoths have been in contact with their tax attorneys and consultants again in the last two weeks, hoping to find a way around this. These firms were trying to set up entities to avoid paying taxes. They made plans to outsource compliance services, but this was not permitted.
“The government has specifically denied this request. Our client was told that the nodal officer has to be part of the US entity or a separate entity, and neither can this function be outsourced nor can they hire anyone on a temporary or consulting basis, one of the advising lawyers told.
Twitter refuses to respond to questions about potential tax consequences. Google and Facebook did not reply to requests for information. Read more about the IT rules made in India https://thedigitalhacker.com/as-new-it-rules-take-effect-
According to tax experts, this rule will force firms to maintain a permanent presence in India.
Girish Vanvari, founder of tax advisory firm Transaction Square said,
“Appointment of a nodal officer could create a permanent establishment for these digital giants in India and have a huge tax impact from paying 6% equalization levy to paying about a higher tax on entire income. Also, some of these companies are already litigating the PE aspect in Indian courts, and even that could have a larger impact.”
These firms have offices in India, but owing to the different structures within which they function, tax rules do not bring all of the money earned in India into the tax net. PE is a tax concept that defines which country has the authority to tax a multinational’s earnings and to what degree.