Electronic tax

From e-commerce growth to aligning with global digital tax trends, what the tech sector expects from Fm Nirmala Sitharaman

The tectonic shift wrought by the COVID-19 pandemic has forced us to reimagine every possible facet of our daily lives, healthcare systems, and business models. At the epicenter of this watershed moment was the unprecedented adoption of technology, propelling a “never seen before” cultural transformation that otherwise was a distant future to experience.

Closer to home, India’s tech sector, known for its cutting-edge innovation capabilities and globally replicable success, has dutifully fought the pandemic without letting businesses suffer. In addition to fostering collaboration between individuals, companies and institutions, the sector has, for India, accelerated digitalization beyond its national shores, for good. The sector’s significant contribution to the economy in good and trying times like these is unprecedented.

With the budget coming amid recovery, despite the threat of Omicron, the industry is looking for booster shots, particularly around tax laws to help drive overall investment and ease of use.

Simplify ‘Hybrid’ mode

Working from home has become one of the biggest transformation stories of this century. However, from a tax perspective, businesses need clarity on eligibility for income tax exemption with respect to services performed remotely by employees of special economic zone units. (SEZ). A step in this direction would go a long way to reducing uncertainty and avoiding potential litigation.

The government should also consider relaxing the provisions regarding the use of SEZ reserves, which is currently limited to the acquisition of plant and machinery. Since IT/ITeS companies, which are a dominant part of approved SEZ units, do not have large investment requirements, they are not able to fully utilize the SEZ pool and lose investment benefits. tax exemption.

Fueling e-commerce growth

In 2020, the government introduced a new provision imposing withholding obligations on e-commerce operators. While some aspects of the provision have been clarified by the income tax administration, ambiguities remain such as the applicability of the provision on platforms merely listing the products of other online sellers or e-commerce operators .

Additionally, the provision forces e-commerce operators to withhold tax even if payments are not routed through the e-commerce operator, which is extremely onerous to comply with. This sector has been a force multiplier in the current environment; therefore, it is imperative to clarify unresolved issues and ease the burden of compliance.

Align with global digital tax trends

The Equalization Tax (EL) provisions have been expanded from 1 April 2020 to include a 2% tax on online transactions involving the sale of goods or the provision of services by non-residents in India.

While some clarifying amendments were introduced last year, various issues of interpretation regarding the scope and coverage of the EL provisions remain. The recent signing of the OECD statement and the transitional approach agreed with the United States regarding EL’s credit versus OECD first pillar liabilities give a strong indication of its withdrawal, although unlikely in this year’s budget.

That said, clarification of open interpretive issues would provide certainty to taxpayers and ensure better compliance. Considering that there might be possible disputes around interpretation aspects, it is necessary to introduce a grievance mechanism to resolve these issues.

Addressing cross-border mobility issues

One of the many disruptions brought by the pandemic has resulted in the stranding of several foreign corporate business travelers due to imposed flight restrictions. This has led to concerns regarding the triggering of the foreign employer’s taxable presence in India (i.e. permanent establishment and place of effective management risks), as well as the taxation of individual.

The technology sector, in particular, has had to bear the brunt of restrictions on cross-border mobility. A clarification from the government in this regard, exempting these companies from any tax liability either through permanent establishment or tax residency, would be greatly appreciated.

On an individual level, relief has been provided for the 2019-2020 financial year and general guidelines have been issued for subsequent years for the mitigation of double taxation of wage income under the tax treaty. That being said, an explicit relaxation of Indian tax laws would be welcome as the pandemic continues to impact travel.

Safe Harbor in its most authentic form

The upper income threshold for Safe Harbor eligibility for transfer pricing for IT/ITeS transactions is currently Rs 200 crore. Companies whose transactions exceed the prescribed threshold are not eligible to avail themselves of the safe harbor by granting a higher margin. To gain tax certainty, these companies only have the option of obtaining an Advance Pricing Agreement (APA), which is a time-consuming process.

The industry is therefore seeking an increase in the revenue threshold for Safe Harbor eligibility, to improve India’s attractiveness as an IT/ITeS outsourcing destination and reduce litigation.

Additionally, companies are struggling to maintain prescribed safe harbor margins in today’s operational dynamics. It is therefore imperative to review margins and provide the necessary relief in light of the impact of COVID-19. Some relief in this direction should be welcomed with open arms, given the importance of this sector for the public purse.

As FM embarks on the 2022 budget swing, against a backdrop of promises to keep, the tech sector will be eagerly awaiting its fair share. While the government has shown unwavering commitment and support for digitalization, getting the sector in the right momentum will be key to accelerating India’s recovery and realizing India’s ambition. $1 trillion digital economy.

Author Naveen Aggarwal is Partner – Tax at KPMG, India. The opinions expressed are personal.