Taxmann's PPT for Webinar on Taxation of Digital Economy by Taxmann

Taxation of the Digital Economy

16 October 2021 Direct Tax Team:

Indirect Tax Team:

Raghav Kumar Bajaj, Principal Associate

Sudipta Bhattacharjee, Partner

Jugal Mundra, Associate

ABOUT TAXMANN Taxmann is the leading publisher on Tax & Corporate Laws in India We also maintain the largest and the most accurate online database on Income Tax, International Taxation, GST, Company & SEBI Law, Insolvency & Bankruptcy Code, FEMA Banking & NBFC, Competition Law, Accounts & Audit and Indian Acts & Rules. Our Products include: Books Journals Online and Offline Research Platform Tools for TDS Compliances We have developed the National Website of the Income-Tax Department and we also maintain it with our technology and editorial support.

TIPS FOR ATTENDEES Your mike is on mute. You will not be able to communicate during the session. However, you may post your questions in the chat box given on your right-hand side.

Your questions will be answered by the speaker after the session or during the session by the R&D Team. After the session, you will get the copy of this presentation for your future references.

POTENTIAL OF THE DIGITAL ECONOMY Digital economy & e-commerce --> changed the way how value is created and exchanged. Huge potential for all-inclusive economic growth: o Indian e-commerce and online retail market set to grow multifold - India’s consumer digital economy is expected to become a $800 billion market by 2030. o Global internet traffic is increasing – constantly and rapidly. Digital divide world-over in terms of internet usage across developing economies and developed economies o Internet usage in developed economies for online shopping is more. o Developing economies’ participation in social networks is more --> More scope for ecommerce penetration.

Data is the new oil: o A key strategic asset for the creation of both private and social value. o India has adopted an approach that shields itself from “data colonialism”. Digital economy taxation is rapidly evolving: Supply side factors + Demand side factors.

IMPORTANCE OF TAXATION OF THE DIGITAL ECONOMY Why is digital taxation such a hyped and talked about topic? Why can’t existing tax rules deal with taxation of digital economy and e-commerce? Multiple factors: o Relatively new field. o Growth drivers in digital economy and e-commerce are not the same as those in traditional economy sectors. o Digital economy transcends geographical borders and physical mobility restrictions. o Digital economy is LOCATION LESS. Resultantly, existing set of tax rules – which were primarily set on a physical presence-based nexus rule – became ineffective and inadequate when it came to taxing the digital economy. Ultimate objective: profits arising from digital economy and e-commerce transactions get taxed where value creation happens! Scope of digital economy taxation laws is expanding.

KEY EVENTS IN THE DIGITAL TAXATION JOURNEY  OECD’s BEPS Project Action 1 - “Addressing the tax challenges of the Digital Economy” did not reach a conclusive solution and instead provided 3 options:

o Significant Economic Presence; o Withholding Tax; and o Equalisation Levy.  Interestingly, India left no stone unturned and adopted ALL these routes to tax the virtual economy.

o Significant Economic Presence; o Withholding Tax; and o Equalisation Levy.  Interestingly, India left no stone unturned and adopted ALL these routes to tax the virtual economy. Equalisation levy (Outside of tax treaties)  2016: 6% levy, online advertising.  2020: 2% levy on e-commerce transactions.

Significant Economic Presence (treaty protection available)  2018: Principal provision introduced.  Applicability got deferred. Applicable for FY 2021-22 and onwards.

TDS on e-commerce transactions  Section 194-O introduced in 2020.  1% TDS applicable vis-à-vis e-commerce participants.

Significant Economic Presence (treaty protection available)  2018: Principal provision introduced.  Applicability got deferred. Applicable for FY 2021-22 and onwards.

TDS on e-commerce transactions  Section 194-O introduced in 2020.  1% TDS applicable vis-à-vis e-commerce participants.

 What may appear as an ‘eagerness’ to tax digital transactions may also be just an attempt to ensure that we don’t lose out on fair & legitimate taxing right. 7

SIGNIFICANT ECONOMIC PRESENCE (SEP) | EXPLANATION 2A TO SECTION 9(1)(i) OF THE INCOME-TAX ACT 1961.  Provides for a new nexus rule in section 9(1)(i) – extends the scope of ‘business connection’ for foreign enterprises.  It’s a domestic tax law provision --> tax treaty protection is available.  Provides taxation rights to ‘source countries’ like India.  Consequence of SEP: Once the SEP-based ‘business connection’ test is met, so much of income which is attributable to SEP-based activities will be deemed to accrue or arise in India.

 Two forms of SEP: Revenue based SEP and User based SEP. Separate thresholds have been prescribed for both. Type of SEP I.

II.

Threshold

Payments-based SEP Transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed User-based SEP Systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed in India through digital means *Text in red font denotes changes introduced through Finance Act 2020

INR 2 crores

300,000 users

 SEP acknowledges the fact regarding transactions or interactions with a person in India --> foreign entity’s ‘virtual presence’ in India. 10

INCOME ATTRIBUTION RULES | EXPLANATION 3A TO SECTION 9(1)(i) OF THE INCOME-TAX ACT 1961.  Existing income attribution rule for ‘business connection’: income which is reasonably attributable to the operations carried out in India is deemed as having an India nexus.  Income-tax Act has been amended to provide that following three categories of income will be deemed as ‘income attributable to operations carried out in India’ and hence, taxable in India. 1) Income from advertisement that targets Indian customers, or (This covers ADVERTISEMENT which targets a customer who resides in India or a customer who accesses the advertisement through IP address located in India.) 2) Income from sale of data collected from India, or (What is relevant is that there should be a SALE OF DATA which has been COLLECTED from the specified persons. General cases of ‘data usage’ are not covered.) 3) Income from sale of goods and services using such data collected from India. (This covers sale of goods or services using the data mentioned in the 2nd category. Basically, there has to be a connection between the ‘data collected’ and the ‘sale of goods or services’.)

EQUALISATION LEVY 1.0 - ONLINE ADVERTISING 

Introduced in 2016 – EL 1.0 was found to be simpler approach to adopt in tax laws.

EQUALISATION LEVY 1.0 - ONLINE ADVERTISING  

Introduced in 2016 – EL 1.0 was found to be simpler approach to adopt in tax laws. Key features of EL 1.0: o Nature of levy: ‘digital services tax’ or a ‘transactional tax’. o Rate: 6%.

EQUALISATION LEVY 1.0 - ONLINE ADVERTISING  



Introduced in 2016 – EL 1.0 was found to be simpler approach to adopt in tax laws. Key features of EL 1.0: o Nature of levy: ‘digital services tax’ or a ‘transactional tax’. o Rate: 6%. o Applicability test: non-residents receiving consideration for rendering specified services (basically online advertising) TO – a) an Indian resident carrying on business or profession, or b) a non-resident having PE in India. (Factors like location of the target audience for whom the advertisement is generated, whether the customers are in India, whether the advertisement is likely to boost the revenues in India are irrelevant considerations.) Exemptions / exclusions: o Non-resident service provider has PE in India and the specified service is effectively connected with such PE. o Amount of consideration does not exceed INR 1 lakh. o Specified service is NOT for the purpose of carrying out any business or profession.

EQUALISATION LEVY 1.0 - ONLINE ADVERTISING  



EQUALISATION LEVY 1.0 - ONLINE ADVERTISING  



EQUALISATION LEVY 2.0 - E-COMMERCE SUPPLY & SERVICES  

Introduced in 2020 by Finance Act 2020 to enlarge the scope of EL. Not mentioned in Finance Bill 2020 --> legislative intent or rationale behind its introduction is not available.

EQUALISATION LEVY 2.0 - E-COMMERCE SUPPLY & SERVICES   



EQUALISATION LEVY 2.0 - E-COMMERCE SUPPLY & SERVICES   



Introduced in 2020 by Finance Act 2020 to enlarge the scope of EL. Not mentioned in Finance Bill 2020 --> legislative intent or rationale behind its introduction is not available. Despite EL 1.0 having enabling language for government to notify other services also for EL 1.0; this expanded scope was introduced as a separate levy EL 2.0 by way of a separate charging section – section 165A of Finance Act 2016. Key features of EL 2.0: o Rate: 2%. o Applicability test: consideration received or receivable by a non-resident e-commerce operator from e-commerce supply or services MADE OR PROVIDED OR FACILITATED, by it TO –  a person resident in India; or  a non-resident in the specified circumstances; or [“specified circumstances” mean- (1) sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement through IP address located in India; and, (2) sale of data, collected from a person who is resident in India or from a person who uses IP address located in India.]  a person who buys such goods or services or both using IP address located in India. (A question that arises is whether services can be ‘sold’?) 23

EQUALISATION LEVY 2.0 - DEFINITIONS OF CERTAIN TERMS E-commerce supply or services (ESS)

“e-commerce supply or services” means – o online sale of goods owned by the e-commerce operator; or o online provision of services provided by the ecommerce operator; or o online sale of goods or provision of services or both, facilitated by the e-commerce operator; or o any combination of these activities. Explanation to the definition of ESS states that for the purposes of this clause, “online sale of goods” and “online provision of services” SHALL INCLUDE ONE OR MORE OF THE FOLLOWING ONLINE ACTIVITIES, namely:–– (a) acceptance of offer for sale; or (b) placing of purchase order; or (c) acceptance of the purchase order; or (d) payment of consideration; or (e) supply of goods or provision of services, partly or wholly. 24

EQUALISATION LEVY 2.0 - DEFINITIONS OF CERTAIN TERMS E-commerce supply or services (ESS)

E-commerce operator “e-commerce operator” means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both

EQUALISATION LEVY 2.0 - DEFINITIONS OF CERTAIN TERMS E-commerce supply or services (ESS)

"online" has been defined to mean a facility or service or right or benefit or access that is obtained through the internet or any other form of digital or telecommunication network.

EQUALISATION LEVY 2.0 - DEFINITIONS OF CERTAIN TERMS E-commerce supply or services (ESS)

"online" has been defined to mean a facility or service or right or benefit or access that is obtained through the internet or any other form of digital or telecommunication network. Consideration received or receivable from ESS consideration received or receivable from ESS shall include–– o consideration for sale of goods irrespective of whether the ecommerce operator owns the goods;

o consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator. This is an important aspect in the levy of EL 2 as it widens the base on which the 2% EL 2 is to be calculated. This can lead to some complexities also! 27

EQUALISATION LEVY 2.0 - OTHER ASPECTS 

Exemptions / exclusions: o where the e-commerce operator has a PE in India and such ESS is effectively connected with such PE; o where EL 1.0 is leviable; o where the sales, turnover or gross receipts of the e-commerce operator from the ESS made or provided or facilitated as referred to in this regard is less than INR 2 crores (~USD 270,000) during the previous year. (This filter is with reference to ESS that are ‘referred to’ in the charging section of EL 2.0.)

EQUALISATION LEVY 2.0 - OTHER ASPECTS 



Other aspects of EL 2: o Not like a TDS provision. o Liability for compliance with EL 2.0 rests with the e-commerce operator…that is the foreign enterprise! o Payment of EL to Government of India to made on quarterly basis. o Corresponding exemption available under the Income-tax Act.

EQUALISATION LEVY 2.0 - OTHER ASPECTS 



In a nutshell, the focus of EL 2 is on income generating operations carried on by non-residents through digital means and having an Indian inclination.



EL 2.0 is widely worded --> Intra-group transactions can also be impacted. 30

TDS ON CERTAIN E-COMMERCE TRANSACTIONS | SECTION 194-0  Section 194-O inserted in Income-tax Act vide Finance Act 2020 to introduce a new TDS requirement with effect from 1 October 2020.

TDS ON CERTAIN E-COMMERCE TRANSACTIONS | SECTION 194-0  Section 194-O inserted in Income-tax Act vide Finance Act 2020 to introduce a new TDS requirement with effect from 1 October 2020.  Key features: o Rate: 1% on the ‘gross amount of such sales or services or both’. o Applicable on an e-commerce operator if it facilitates sale of goods or provision of services of an e-commerce participant through its digital or electronic facility or platform.  Basically, this section makes the e-commerce intermediaries as the nodal point of contact for income-tax department.  ‘E-commerce operator’ | definition similar to EL 2.0; defined as person who owns, operates or manages digital or electronic facility or platform for electronic commerce. 1% TDS applies to resident as well as non-resident e-commerce operators.  ‘E-commerce participant’ | an Indian resident selling goods or providing services or both, including digital products, through digital or electronic facility or platform for electronic commerce. (Thus, if the sale of goods or provision of services on the platform is done by a non-resident seller, this TDS will NOT apply.)

TDS ON CERTAIN E-COMMERCE TRANSACTIONS | SECTION 194-0  Other aspects of TDS under section 194-O: o Payment made directly by the customer to the e-commerce participant is also subject to this TDS --> Practically, this aspect will be extremely difficult to comply with by ecommerce operators. o Base is Gross amount --> it would cover any incidental charges also. o Transactions covered by section 194-O are exempt from TDS under all other provisions of Chapter XVII-B of Income-tax Act.  Exemptions / exclusions: o Individual / HUF + amount not exceeding INR 5 lakhs + PAN / Aadhaar number furnished to e-commerce operator. o Transactions in securities and commodities which are traded through recognized stock exchanges. o Payment gateways, provided tax has been deducted under section 194-O on the same transaction by the ecommerce operator. o Insurance aggregators, if renewal and other transactions in respect of the insurance policy purchased through aggregator platform are carried out directly between the insurance companies and policy holders.  Interplay between section 194-O, section 194Q and section 206C(1H) will be important. 37

SC JUDGEMENT ON CLASSIFICATION OF SOFTWARE PAYMENTS AS ROYALTY  Landmark judgement by the Supreme Court in Engineering Analysis Centre of Excellence settled a two-decade-old issue in favor of taxpayers relating to payments for software to non-residents.

 Controversy o The controversy was whether such payments are for “copyright" or “copyrighted article”. o In case of former, the income would be ‘royalty income’ on which TDS would be applicable for payment to non-residents. o In case of latter, the income would be ‘business income’ and there would be no withholding obligation on the resident (unless the nonresident has a permanent establishment in India).  Supreme Court ruling The SC held that o The end-user was only allowed to use the software product and there was no transfer of interest in the copyright of the software. o Hence the essence of the transaction was that of ‘sale of copyrighted article’ and did not qualify as royalty under the relevant tax treaties. 40

GST AND DIGITAL – KEY TOUCH-POINTS 

“services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention and impossible to ensure in the absence of information technology and includes electronic services such as,– (i) advertising on the internet; (ii) providing cloud services; (iii) provision of e-books, movie, music, software and other intangibles through telecommunication networks or internet; (iv) providing data or information, retrievable or otherwise, to any person in electronic form through a computer network; (v) online supplies of digital content (movies, television shows, music and the like); (vi) digital data storage; and (vii) online gaming;”

OIDAR Services

E-commerce operator

Section 2(17) of the IGST Act defines Online Information Data Base Access and Retrieval services (‘OIDAR’) as –



Sections 2(44) and (45) of the CGST Act define the terms ‘electronic commerce’ and ‘electronic commerce operator’ (“E-comm operator”) respectively.



Section 2(44) – “electronic commerce means the supply of goods or services or both, including digital products over digital or electronic network;”



Section 2(45) – “electronic commerce operator means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce;”



TCS obligations – Section 52

Section 9(5) of the CGST Act: Government can specify the supplies, which if made through an E-commerce operator then, the E-commerce operator would be held liable to deposit the tax, as if such E-commerce operator is the supplier of services. 41

GST AND DIGITAL – OIDAR: SIMILARITIES WITH EU  In case an OIDAR supplier supplies services to a non-taxable recipient, Section 14 of IGST Act casts an onerous liability on the supplier of OIDAR services to take registration in India and deposit GST.  Similar provisions also exist under the European Union Value Added Tax (“EU VAT”).  Article 358(2) of the EU VAT Directive (bearing number 2006/112/EC) defines the term ‘electronic services’ and ‘electronically supplied services’ as the services referred to in Article 56(1)(k) of the said Directive.  Article 56(1)(k) cross refers to Annex II of the Directive where such ‘electronic services’ and ‘electronically supplied services’ are listed. A few services are mentioned in Annex II are listed below:  Supply of digitized products generally, including software; digitized content of books and other electronic publications; provision of advertising space; accessing or downloading of music; accessing or downloading of films; automated distance teaching dependent on the Internet and the supply of which requires limited or no human intervention, except where the Internet or similar electronic network is used as a tool simply for communication between the teacher and student; etc.  Chapter 6 Sub-section 2 of the EU VAT Directive envisages a special scheme for the suppliers of electronic services. As per this scheme the supplier of electronic services should register itself in the Member State and should deposit VAT on the supplies made by it. 42 © Khaitan & Co 2021

GST AND DIGITAL (CONTD.) Examples Examples of companies offering OIDAR services    

Examples of companies offering services taxable under Section 9(5) of the CGST Act

Netflix

Examples of companies functioning as E-comm operators 

Amazon



Flipkart

Shaadi.com Subscription of online newspapers and journals



Uber



Ola

Online games

Foreign cryptocurrency exchanges – do they qualify as OIDAR service provider?

GST AND DIGITAL (CONTD.) – APPLICABILITY OF OIDAR: ADVANCE RULING IN NCS PEARSON INC.  A service would qualify as OIDAR service if it is mediated by information technology and involves minimal human intervention.  What does the phrase ‘minimal human intervention’ mean and what is the scope of this phrase?  Ruling by the Appellate Authority for Advance Ruling (“AAAR”) in the case of NCS Pearson Inc., 2021 (44) G.S.T.L. 215 (App. A.A.R.-GSTKar.). The Applicant was engaged in the business of conducting tests for its clients. There were three categories in which the tests were conducted. Type 1 – Test is completely selfadministered. Test involves only multiple-choice questions and is automatically checked and scored by the Applicant’s electronic software.

Type 2 – Candidates enroll themselves on the Applicant’s portal. The Applicant provides the location of the test center. Candidates visit the test center, where an invigilator checks their identity. Once the test is completed, the scores are immediately provided to the candidates by the Applicant’s electronic software.

Type 3 – This type is similar to type 2. The only addition is that the test involves essay type questions. The essay questions are scored by Applicant’s electronic software and by a human expert. If the difference in the scores is more than a threshold, the same is marked by a third human expert and such expert’s marking is considered as final.

 Issue - whether type–2 and type-3 tests qualify as ‘OIDAR service’? AAR held that test type-2 qualifies as OIDAR; however, type-3 does not.  AAAR held that both the types qualify as OIDAR service and observed - “19…The European VAT Committee had agreed that for the assessment of the notion of ‘minimal human intervention’, it is the involvement on the side of the supplier which is relevant and not that on the side of the customer. ..it is seen that scoring by a human scorer is just one of the processes involved in a computer-based test… the scoring done by the human scorer is to be regarded as being within the realm of minimum human intervention. As such the ingredient of ‘minimum human intervention’ required to classify the service as OIDAR is also satisfied..” 44

GST AND DIGITAL (CONTD.) – TAXABILITY OF ‘INTANGIBLE GOODS’ WHEN IMPORTED INTO INDIA  With the advent of digitization, there has been a significant rise in online purchase of softwares, which are typically used by individuals / companies in their day-to-day business.  In case a person imports a CD/DVD consisting a particular software then, Customs Duty is leviable  What happens when a person downloads software by accessing an online portal or a cloud server? Or when a trademark is permanently sold to an Indian entity?  In 1998 the countries signatory to WTO agreed that – “…we also declare that Members will continue their current practice of not imposing customs duties on electronic transmissions. When reporting to our third session, the General Council will review this declaration, the extension of which will be decided by consensus, taking into account the progress of the work programme…”  Does this mean no import duty on import of intangible goods? Since as per the first proviso to Section 5 of the IGST Act “integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975”.

 Above argument rejected by CESTAT? In the case of Interglobe Aviation Limited [2021-VIL-495-CESTAT-DEL-CU]. Hon’ble Tribunal observed – “integrated tax is levied under section 5 of the Integrated Tax Act, but it is collected in accordance with the provisions of section 3 of the Tariff Act…Thus, integrated tax is levied under section 5(1) of the Integrated Tax Act and only the procedure for collection has been provided under section 3 of the Tariff Act” 45

CASE STUDIES I. Case Study 1: Online Advertising

II. Case Study 2: Online Database Subscription III. Case Study 3: Online Gaming – Example of Online Betting

IV. Case Study 4: Intra-group SaaS Transaction

CASE STUDY 1: ONLINE ADVERTISING Facts • F Co. assists I Co. in making online advertisements that are used by I Co. for promoting sales of its products. • Issues to be examined – o Will EL be applicable? If yes, 2% EL or 6% EL? o Will income-tax be applicable? o Whether I Co. would be liable to deposit GST on the services supplied by F Co.?

F Co.

Outside India India I Co.

F Co.

Analysis I. Analysis of income-tax applicability • First determination to be undertaken is whether the service will be classified as ‘fees for technical services’ (FTS) under the relevant tax treaty read with IT Act – if yes, then EL should not apply due to amendment introduced through Finance Act 2021 • Will the present service be classified as ‘consultancy service’ referred in FTS definition of the IT Act and tax treaties?

Outside India India I Co.

F Co.

Outside India India I Co.

I. Analysis of EL applicability • Relevant only if the service does not qualify as FTS. • Definition of ‘specified services’ on which 6% EL applies are “online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement …” • Once 6% EL applies, 2% EL does not apply due to specific exclusion. 49

CASE STUDY 1: ONLINE ADVERTISING (CONTD..) Analysis I. Analysis of GST applicability F Co.

• The services procured by I Co. from F Co. should qualify as an OIDAR service, since internet advertisements is specifically covered in the definition of OIDAR. • I Co. will not qualify as “non-taxable online recipient”.

• Section 2(16) of IGST Act - “non-taxable online recipient means any Government, local authority, governmental authority, an individual or any other person not registered and receiving online information and database access or retrieval services in relation to any purpose other than commerce, industry or any other business or profession, located in taxable territory.”

Outside India India I Co.

• The supply of OIDAR services would thus be taxable on reverse charge basis. Hence, I Co. would be liable to deposit GST. [Notification No. 10/2017Integrated Tax dated 28 June 2017]

CASE STUDY 2: ONLINE DATABASE SUBSCRIPTION Facts • I Co. is engaged in manufacturing pharmaceutical products. • F Co. provides the following online database access services to I Co o Marketing research reports of the pharmaceutical sector collated from various sources; o Chemical information including articles on chemistry topics and substance data. • Issues to be examined – o Will 2% EL be applicable? o Will income-tax be applicable? o Whether the services supplied by F Co. would qualify as OIDAR services? o Whether F Co. would be liable to deposit GST on the services supplied by it to I Co.?

F Co.

Outside India

Online database access services

India

I Co.

F Co.

Analysis Outside India I. Analysis of income-tax applicability • First determination to be undertaken whether the service will be classified as ‘fees for technical India services’ (FTS) or royalty under the relevant tax treaty read with IT Act. • Various judgements have held that the nature of services provided by F Co. to I Co. do not constitute FTS, as they do not involve any technical service requiring human intervention. • As regards royalty, two aspects need to be covered – o In present facts, payment is for copyrighted article -> hence copyright limb of royalty definition should not apply. o Whether it constitutes 'information concerning industrial, commercial or scientific experience’ -> some judgements have used test of ‘previous experience’, ie whether information was acquired by previous experience of the information provider or is it aggregation/supply of third-party experience. India’s position in OECD Commentary -> test of ‘previous experience’ should not apply.

I Co.

Online database access services

F Co.

I Co.

II. Analysis of EL applicability • Relevant only if the service does not qualify as FTS or royalty. • Online database subscription should qualify as online provision of service and hence exigible to 2% EL.

Online database access services

CASE STUDY 2: ONLINE DATABASE SUBSCRIPTION Analysis III. Analysing whether F Co. qualifies as an OIDAR service provider • The services being supplied by F Co. can qualify as OIDAR services, since the same are mediated through an online network and cannot be supplied without an electronic network.

F Co.

IV. Analysing GST is payable by F Co. • I Co. would be liable to deposit on the import of services on reverse charge basis since here too, will not qualify as “non-taxable online recipient”. Outside India

Online database access services

India

I Co.

Deposits INR 1,000 in the e-wallet to begin online betting

Mr. X

Places bet of INR 1000 with odds of ½ (meaning if he wins the bet, website will pay INR 1,500 to Mr A)

e-wallet on the website

Online betting website (non-resident)

CASE STUDY 3: ONLINE GAMING – EXAMPLE OF ONLINE BETTING Facts  Various websites run by non-residents operate in the field of online betting.  In this example, it is assumed that Mr X (Indian resident) bets against the house, i.e. bets against the website (Website) which is run by a non-resident.  No service fee / entry fee is charged by the Website.  Issues to be examined – o Will 2% EL be payable by the Website? o Whether the non-resident hosting the website conducting online betting would qualify as an OIDAR service provider? Analysis related to 2% EL: o For 2% EL to apply, the Website and its activity should satisfy the definition of ‘e-commerce operator’ and ‘e-commerce supply or services’ respectively. o To satisfy both definitions, either ‘online sale of goods’ or ‘online provision of services’ should be involved.

Deposits INR 1,000 in the e-wallet to begin online betting

Mr. X

Places bet of INR 1000 with odds of ½ (meaning if he wins the bet, website will pay INR 1,500 to Mr A)

e-wallet on the website

Online betting website (non-resident)

Deposits INR 1,000 in the e-wallet to begin online betting

e-wallet on the website

Analysis related to 2% EL: o For 2% EL to apply, the Website and its activity should satisfy the definition of ‘e-commerce Places bet of INR 1000 operator’ and ‘e-commerce supply or services’ respectively. with odds of ½ o To satisfy both definitions, either ‘online sale of goods’ or ‘online provision of services’ Mr. X (meaning if he wins the Online betting should be involved. bet, website will pay INR website o Does online betting entail ‘online sale of goods’? 1,500 to Mr A) (non-resident) o ‘Goods’ not defined in EL or the Income-tax Act. ‘Goods’ defined in Sale of Goods Act 1930 (SOGA) as “goods” means every kind of moveable property other than actionable claims and money; …” o ‘Actionable claims’ is defined in Section 3 of the Transfer of Property Act, 1882 as “a claim to any debt….of the claimant, which the civil courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent.” o Since actionable claims are specifically excluded from the definition of goods in SOGA, question is whether actionable claims constitute goods in the general sense. o Supreme Court in the case of Sunrise Associates and Skill Lotto Solutions Pvt Ltd. has held that “actionable claims” are goods. 57

Deposits INR 1,000 in the e-wallet to begin online betting

Mr. X

Places bet of INR 1000 with odds of ½ (meaning if he wins the bet, website will pay INR 1,500 to Mr A)

e-wallet on the website

Online betting website (non-resident)

Deposits INR 1,000 in the e-wallet to begin online betting

Mr. X

Places bet of INR 1000 with odds of ½ (meaning if he wins the bet, website will pay INR 1,500 to Mr A)

e-wallet on the website

Online betting website (non-resident)

CASE STUDY 3: ONLINE GAMING – EXAMPLE OF ONLINE BETTING o A “sale” of goods implies transfer in the ownership / property in goods. In the present facts, a position can be taken that the actionable claim of betting is not owned by the Website, but in fact come into existence only when a bet is placed by Mr. X; therefore, there is no “transfer” or “sale” but Deposits INR 1,000 in the only a “creation” of actionable claim at the time of placing the bet. e-wallet e-wallet to begin online o On this basis, a position may be there is no “sale” of goods taking place on on the betting website the Website.  Does online betting entail ‘online provision of service’? o View 1: Since customers bet against the house, no element of service is involved on such component and online betting cannot be considered Places bet of INR 1000 as ‘provision of service’. Mr. X with odds of ½ o View 2: Website is providing service in the form of access to Website, (meaning if he wins the Online betting facilitating the entire process from set-up of accounts to settlement of bet, website will pay INR website 1,500 to Mr A) bets, ensuring protection of customer accounts and data, etc. and (non-resident) hence online service is involved.  Consideration / Taxable Base on which EL should apply Assuming that online betting constitutes ESS, what is the amount on which 2% EL should be levied? o View 1: 2% EL should be levied on the bet amount of INR 1,000 on the basis that online betting has a service element which is embedded in the overall commercial arrangement / business model of bet money being received. o View 2: Since no service fees is being charged, no consideration is received by the Website and hence EL charge fails. 60

CASE STUDY 3: ONLINE GAMING – EXAMPLE OF ONLINE BETTING Analyzing whether online betting website qualifies as an OIDAR service provider: o Online gaming is categorically included in the definition of OIDAR services. Therefore, hosting of website for conducting online betting may qualify as an OIDAR service.

Deposits INR 1,000 in the e-wallet to begin online betting

o However, despite being qualified as an OIDAR service provider, the non-resident may not be required to deposit GST, since there is no charge / consideration for supplying the OIDAR services. o ‘Game of skill’ versus ‘game of chance’ debate not relevant here – but will special valuation provision apply? o Special valuation provision for “lottery, betting, gambling and horse racing”: [Rule 31A(3) CGST Rules, 2017] provides that the value of supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club shall be 100% of the face value of the bet or the amount paid into the totalizator.

Mr. X

Places bet of INR 1000 with odds of ½ (meaning if he wins the bet, website will pay INR 1,500 to Mr A)

e-wallet on the website

Online betting website (non-resident)

CASE STUDY 4: INTRA-GROUP SAAS TRANSACTION Facts • ABC Co is the central procuring company - enters into a master service agreement with US Co for certain SaaS supply to various group companies across the world. • ABC Co has a group company in India called ABC India, and ABC Co cross charges ABC India for the SaaS access obtained by ABC India from US Co. • Issues to be examined – o Would any income-tax be payable in India on the cross-charge from ABC Co to ABC India? o Would 2% EL be payable on any leg of the arrangement? o Whether GST would be payable on this transaction? Analysis I. Analysis of income-tax applicability • Basis Supreme Court decision in Engineering Analysis Centre of Excellence, income earned by US Co will not be chargeable as royalty or FTS provided US Co is entitled tax treaty benefit.

CASE STUDY 4: INTRA-GROUP SAAS TRANSACTION  ‘E-commerce supply or service’ -> Provision of SaaS should qualify as ESS.

CASE STUDY 4: INTRA-GROUP SAAS TRANSACTION  ‘E-commerce supply or service’ -> Provision of SaaS should qualify as ESS.  Is US Co receiving any consideration for providing ESS to ABC India? A reading of the charging section (section 165A) suggests that is not necessary that the e-commerce operator must receive consideration only from the Indian resident recipient; the requirement is that the e-commerce operator must provide / facilitate the e-commerce supply or service to an Indian resident. o View 1: If the master services agreement reads that US Co shall provide services to ABC Co and / or its affiliates, a literal interpretation can be applied to consider US Co as providing services to ABC India. If such a view is adopted, the amount on which US Co should pay 2% EL would be the consideration received by US Co from ABC Co for the service utilized by ABC India. o View 2: In the absence of a contractual relationship between US Co and ABC India, US Co cannot be considered to provide services to ABC India. If this view is adopted, 2% EL would not be payable by US Co.

CASE STUDY 4: INTRA-GROUP SAAS TRANSACTION Analysis (contd.) III. Analysis of GST applicability  In this transaction it can be stated that the services are being supplied by ABC Co. to ABC India since the consideration is paid by ABC India to ABC Co. and also because ABC India is not privy to contract entered into between ABC Co. and US Co.  Unlikely to qualify as OIDAR services - ABC India would be treated as an importer of service and would be liable to deposit GST on reverse charge basis.

WAY FORWARD / KEY DEVELOPMENTS TO LOOK FORWARD IN FUTURE | INCOME TAX 

Different types of statutory provisions --> interpretational issues and practical challenges are bound to come.

WAY FORWARD / KEY DEVELOPMENTS TO LOOK FORWARD IN FUTURE | INCOME TAX  

Different types of statutory provisions --> interpretational issues and practical challenges are bound to come. OECD / G20 Inclusive Framework | “Statement on a two-pillar solution to address tax challenges arising from the digitalisation of the economy” – latest Statement dated 8 October 2021 agreed among 136 countries.

WAY FORWARD / KEY DEVELOPMENTS TO LOOK FORWARD IN FUTURE | INCOME TAX  

o Amount A:  Seeks to create a new taxing right for market jurisdictions in the form of share of residual profit or share of excessive profit, whereby once an MNE group’s profit reaches 10% of revenues, market jurisdictions would be able to tax 25% of the profits above that level.  Profit allocation will be done to only those market jurisdictions where such MNEs derive revenue above certain threshold.  Global turnover threshold prescribed as € 20 billion and profitability (i.e. profit before tax / revenue) should be above 10%. o Amount B:  Aims to standardise remuneration of related party distributors’ performing baseline marketing and distribution activities in a manner that is aligned with arm's length principle, focusing on the needs of low-capacity countries. o Interestingly, the Pillar One proposal does not differentiate between digital and nondigital businesses! o Implementation timeline:  Amount A to be implemented through a multilateral treaty, which will be developed and opened for signature in 2022, with Amount A coming into effect in 2023.  Work on Amount B is expected to be completed by end of 2022. 73

WAY FORWARD / KEY DEVELOPMENTS TO LOOK FORWARD IN FUTURE | INCOME TAX  

 Work on Amount B is expected to be completed by end of 2022. 74

WAY FORWARD / KEY DEVELOPMENTS TO LOOK FORWARD IN FUTURE | INCOME TAX  

Pillar Two | Addressing remaining BEPS challenges and global minimum tax o Global anti-Base Erosion Rules (ie GloBE Rules):  If income of a constituent entity in the MNE group is taxed below an agreed minimum tax rate, residence jurisdiction of the eligible parent entity (or entities) will be able to levy an additional tax to the extent of difference between the effective tax levied and the agreed minimum rate.  The Statement provides for a minimum tax rate of 15%. o Subject to tax rule (ie STTR):  STTR will allow source jurisdictions to impose limited source taxation on related party payments (being interest, royalties and a defined set of other payments) that are subject to tax below a minimum rate in the residence jurisdiction.

 Work on Amount B is expected to be completed by end of 2022. 75

WAY FORWARD / KEY DEVELOPMENTS TO LOOK FORWARD IN FUTURE | INCOME TAX  

 Work on Amount B is expected to be completed by end of 2022. 76

GST AND DIGITAL – THE FUTURE  OECD’s “Statement on a two-pillar solution to address tax challenges arising from the digitalisation of the economy” may not have a direct impact on GST. Other recent developments in EU and OECD: 

OECD – April 2021: Report on the impact of the growth of the sharing and gig economy on VAT/GST policy and Administration.



OECD – June 2021: VAT/GST digital economy toolkit for the Latin America and Caribbean region.



EU VAT – 2017: VAT Directive apropos e-commerce.



EU VAT – July 1, 2021: VAT Directive and Implementing Regulation amending the e-commerce package published in the Official Journal effective from July 1, 2021.

 Most of the changes envisaged are already covered in India.

 One hopes for clarity on GST issues, for example: If a 5% GST rate is available subject to the condition that ‘credit of input tax charged on goods or services used in supplying the service has not been taken’, does this restriction apply even on an e-commerce operator paying GST under section 9(5)?  9(5) says - “as if he is the supplier liable for paying the tax…”. Can it be argued that an e-commerce operator is made liable only to pay the GST which was ordinarily payable by the actual provider of the specified service; The limited purpose of putting the ecommerce operator in the shoes of the actual service provider is for payment of tax and as such the input credit restrictions cannot be read into it. 77

CONCLUSION 

Digital taxation is only going to get more interesting and complex in times to come. Involvement of international tax and crossborder taxation aspects also makes it even more intriguing.

CONCLUSION 

Digital taxation is only going to get more interesting and complex in times to come. Involvement of international tax and crossborder taxation aspects also makes it even more intriguing.



Indian population base --> biggest ammunition and contributory factor in negotiating a better share of global tax revenues.

CONCLUSION 

Digital taxation is only going to get more interesting and complex in times to come. Involvement of international tax and crossborder taxation aspects also makes it even more intriguing.



Indian population base --> biggest ammunition and contributory factor in negotiating a better share of global tax revenues.



Traditional FAR approach – that is Functions performed, Assets employed and Risks undertaken – to determine ‘value creation’ only considers supply side factors and not demand factors.



Market jurisdictions also enable ‘value creation’ and hence, FAR must transit to FARM…that is FAR plus Market!

CONCLUSION 

Digital taxation is only going to get more interesting and complex in times to come. Involvement of international tax and crossborder taxation aspects also makes it even more intriguing.



Indian population base --> biggest ammunition and contributory factor in negotiating a better share of global tax revenues.



Traditional FAR approach – that is Functions performed, Assets employed and Risks undertaken – to determine ‘value creation’ only considers supply side factors and not demand factors.



Market jurisdictions also enable ‘value creation’ and hence, FAR must transit to FARM…that is FAR plus Market!



Hopefully, the teething issues will be resolved soon.

CONCLUSION 

Digital taxation is only going to get more interesting and complex in times to come. Involvement of international tax and crossborder taxation aspects also makes it even more intriguing.



Indian population base --> biggest ammunition and contributory factor in negotiating a better share of global tax revenues.



Traditional FAR approach – that is Functions performed, Assets employed and Risks undertaken – to determine ‘value creation’ only considers supply side factors and not demand factors.



Market jurisdictions also enable ‘value creation’ and hence, FAR must transit to FARM…that is FAR plus Market!



Hopefully, the teething issues will be resolved soon.



Digital economy taxation is, perhaps, one of the most interesting, challenging and fascinating segment of global taxation architecture. 82

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