India is 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, and an estimated 60% of the population is expected to use the internet by 2022, and by 2025, India's digital economy could contribute 18-23% to overall economic activity.
The current COVID-19 pandemic has further accelerated the rate of technology adoption across sectors, making it imperative for government, corporates, and consumers to rely on digital channels for accessing goods, services, information, and entertainment.
From a consumer perspective, the current situation has brought about a behavioural shift in the usage of digital channels for high-velocity everyday purchases.
Given the strategic importance of the technology sector, it is important to ensure that the government continues to support this sector through favourable policies and create the infrastructure and ecosystem that fosters innovation.
More specifically, as the economy comes out of the grips of the COVID-19 pandemic, digital infrastructure development assumes significance. Schemes such as Production Linked Incentives (PLI) for electronics manufacturing spurred interest from global investors and is accelerating the growth of domestic manufacturing of electronics and IT equipment.
Also, there is a growing demand for Data Centre infrastructure within India, necessitated by the fast-growing digital economy and data localisation requirements. For a sunrise sector such as Data Centre and Cloud Services, it is important to bring in necessary regulatory and policy interventions, which can improve the ease of doing business and accelerate investments and growth.
It must also be noted that investments in technology have a multiplier effect on the broader economy, and the right ecosystem fosters innovation and development in strategic technology areas. It is with this context that we look at some of the industry expectations from the Union Budget 2020-21.
o Cloud-based transactions are essentially in the nature of 'services' and ordinarily do not allow the user any right to the infrastructure. However, applicability of withholding tax on cloud payments, specifically on services provided by non-residents, has emerged as a hotbed of litigation, with the tax authorities treating payments for cloud services as 'royalty/ Fee for Technical Services'. The government should provide necessary clarification on this issue.
o E-commerce players incur heavy Advertisement Marketing and Promotion (AMP) expenses towards promotion of their products. Tax authorities have been treating such AMP expenses as spent for 'brand building' and capital in nature, even though the benefits of such expenses are short-lived. The government should provide necessary clarification on the tax treatment of AMP expenditure.
o Data localisation regulations require companies to maintain data of Indian customers in India, giving rise to data centre activities in India. Tax authorities have lately been treating such operations as activities triggering the Constitution of Permanent Establishment (PE) in India. As the Indian captive units only maintain data for their foreign counterparts and such activities do not generate any additional income for their counterparts, clarification on applicability of PE provisions on such operations should be provided.
o Deduction of expenditure incurred on scientific research on in-house Research and Development ('R&D') facility has been restricted to 100% w.e.f April 1, 2020. Increasing the weighted deduction under section 35(2AB) to 200% will encourage taxpayers to undertake R&D activities, which will contribute to the growth of India's GDP and the R&D base.
o Under the Base Erosion and Profit Shifting (BEPS) initiative, the Organization for Economic Co-operation and Development (OECD) agreed to develop a consensus-based solution to tackle the issue of non-taxation of revenue in the absence of physical presence. Some of the recently introduced taxes/ levies by the Indian government, being an offshoot of BEPS initiative, are Equalisation Levy ('EQL') and Significant Economic Presence ('SEP'). There are numerous overseas tech companies providing services/ selling goods to Indian customers/ group entities, without having a physical presence in India. Such companies have been facing the following dilemmas:
The newly introduced EQL provisions have various ambiguities associated with them, such as availability of tax credit of EQL in the home country, scope of the term "digital facility", applicability of EQL on intra-group services, dichotomy between the date of applicability of provisions and date of applicability of exemption provisions, etc. The government should come up with clarifications to dispel these ambiguities, including amending the Finance Act to classify EQL as an additional income-tax to enable the non-residents to claim credit of EQL in their home country.
SEP provisions, applicable from April 1, 2021, have evident overlap with withholding tax and EQL provisions. Further, the thresholds under SEP provisions have not yet been notified. The government should either further defer applicability of SEP or provide clarification on the expected interplay between these provisions and also notify the thresholds for applicability of the provisions.
o Refund of Goods and Services Tax (GST) paid on capital goods used in export/zero-rated supplies is not available. Growth in domestic manufacture of electronic products and IT equipment would give rise to purchase of capital goods for the purpose of manufacturing. Further, subsequent exports of such electronic goods manufactured could restrict refunds of GST paid on capital goods used in manufacturing, leading to cash crunch. Hence, a refund of the input tax credit on capital goods should be permitted.
(P. N. Sudarshan, Partner, Deloitte Touche Tohmatsu India LLP,Pramod Bagri, Partner, Deloitte Touche Tohmatsu India LLP and Manikanda Prabhu, Associate Director, Deloitte Touche Tohmatsu India LLP.)