The Indian government may be building the base for a new source of revenue through taxing the digital companies or what are loosely termed internet companies. These companies typically have only an online presence in the country and deal with a large Indian population. They advertise heavily and earn income through them. However, there is no structure to tax them in India. This situation may change.

The Indian government had already brought in an equalization levy of 6% in 2016, which at time applied to Google and came to be identified as Google Tax. It may be applicable to the other players like Facebook and Instagram and every other online player that has a presence in India and earns millions of dollars of revenue through advertisements targeted at Indians.

The Organisation for Economic Cooperation and Development (OECD), a multilateral body, is seized of this issue. OECD has already prepared a framework for taxing the digital companies and has circulated a draft in October 2019. Once this framework is adopted and the countries are free to levy their own rates of tax on the assessed value of business generated through business conducted in that country, India will be able to start taxing these companies. What has now been done is just an enabling provision.

Companies like Netflix and Amazon besides Facebook and Google will all fall into the same category. WhatsApp has also started accepting advertisements. It will have to share a part of its revenues from India as tax with the Indian revenue system.

The broad definition under this new provision in the law will cover “the income of non-residents from advertisements targeted at Indian customers or accessed through Indian IP addresses; income from the sale of data collected from an Indian resident or from a person using an Indian IP address; and income from the sale of goods or services using data collected from an Indian resident or from a person using Indian IP address”.  

The change has been made in the Section 9 of the Income Tax Act to add this new stream of taxation that can add to the revenue the government badly needs. The operative word here is Significant Economic Presence (SEP) which defines at what stage an internet company will become liable to pay tax in India for the transactions it carried out specific to the Indian context.

If necessary, the equalization levy may be subsumed in this new tax, going ahead.