Foreign or local, digital services companies equal before tax law

New Delhi: India has prepared a firm ground to tax the income of foreign digital service companies to shore up revenue and boost the concerted global move towards ending multinational company practices collectively dubbed as base erosion and profit-shifting.

The Budget has proposed an enabling rule, which broadly says that a MNC could have a business connection in India even without a physical presence in the country.

The rule is targeted at companies such as Google and Facebook that are based overseas and provide digital services in India, besides app developers that have users in India, tax officials said. It will encourage Indian digital enterprises and give them a level playing field and also drive their foreign peers to set up shop here.


The move comes after the government imposed an equalisation levy, known as the Google tax, in 2016 on online advertising payments to foreign entities without a permanent establishment in India. Such companies have to pay 6% of the gross payments received from the country to the government and get an equivalent deduction while computing income for tax purposes. If a company has a permanent establishment in India, it pays tax on its income, just as local companies do.

That companies selling digital goods or services could have a taxable presence in India should be seen as an alternative to the equalisation levy, a tax expert said.

The proposal is based on a principle underscored by the OECD that the government has the right to collect tax due on value created in the economy and companies must pay their share of tax in every market where they make a profit.

Foreign digital service companies based in countries with whom India has signed tax treaties will not be hurt. India would need to renegotiate the tax pacts to incorporate the proposed rule.