India Requires Technology-Friendly Tax Policy, Says Deloitte India

India’s digital push and exponential data growth have resulted in strong demand for digital infrastructure and the technology industry has strong expectations from the Union budget to be presented by finance minister Nirmala Sitharaman on February 1. The Union government can look to elevate digital infrastructure as a strategic priority, says Deloitte India. India can increase its share in the data centre market with the necessary policy support and incentives for its development.

P N Sudarshan, partner, leader – Technology, Deloitte India, says, “Technology industry has shown tremendous resilience in the last year in adapting to the new normal. The Covid-19 pandemic has catalysed technology and digital adoption across sectors, and also pushed enterprises to embrace fully distributed workforce and remote work models in a rather short time. On the consumer side, there has been a behavioural shift to adopt digital channels for high velocity everyday purchases, and also for high involvement services like education and healthcare.”

“It must also be noted that technology sector has a multiplier effect on the broader economy,” he adds.

•       India is seeing high growth phase in data centre and telecom market that involve heavy investment in capital expenditure (capex). Incentivising domestic manufacturing for information technology (IT) and telecom equipment can reduce our imports, while also developing the broader electronics manufacturing ecosystem, adds Deloitte India.

•       India has emerged as a global research and development (R&D) destination, with over 1,140 R&D centres of multinational companies (MNCs). Incentivising R&D in technologies such as artificial intelligence (AI), machine learning (ML) and Blockchain could help leverage India’s niche and cost-effective science and engineering talent to build its strategic capabilities in core scientific and industrial research.

India also needs to have a technology-friendly tax policy. With a fast-growing digital economy, there is a strong need to address issues around digital taxation, says Deloitte India.

•       Under the base erosion and profit shifting (BEPS) initiative, the Organisation for Economic Co-operation and Development (OECD) agreed to develop 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):

•       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, among other things. The government should come up with clarifications to dispel these ambiguities.

•       SEP provisions, applicable from April 1, 2021, have evident overlap with withholding tax and EQL provisions. The government should either further defer applicability of SEP or provide clarifications on the expected interplay between these provisions and also notify the thresholds for applicability of the provisions.

•       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 tax deducted at source (TDS) on cloud payments has emerged as a hotbed of litigation, with the tax authorities treating payments for cloud services as ‘royalty/FTS.’ The government should provide necessary clarification on this issue.

•       E-commerce players incur heavy Accelerated Mobile Pages (AMP) expenditure for promoting their products. These expenses are being treated by the tax authorities as ‘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.

•       The main objective of Arm’s Length Price (ALP) principles under customs and transfer pricing laws is to ensure that taxable values on which taxes are levied are correct. Different ALPs being adopted as per customs and transfer pricing laws creates a lot of ambiguities with respect to the valuation resulting in litigation. This gives rise to a need for mechanism that would provide ALP that is acceptable under both customs law and transfer pricing, to eliminate ongoing disputes on the issues.

•       Refund of goods and services (GST) paid on capital goods used in export/zero-rated supplies is currently not available. Capital goods form a large part of investment for businesses and restricting refunds leads to cash crunch, according to Deloitte India. Hence, refund of input tax credit on capital goods should be permitted.