DATA LO­CAL­I­SA­TION & TAX IM­PACT

Financial Chronicle - - EDIT, OPED, THE WORKS -

AS the gov­ern­ment is ag­gres­sively pro­mot­ing dig­i­tal trans­ac­tions the use of dig­i­tal space has en­hanced ex­po­nen­tially. E-com­merce, e-wal­lets, egov­er­nance, etc, has be­come the need of the hour. But pri­vacy of the dig­i­tal plat­form has al­ways re­mained a cause of con­cern in In­dia.

Recog­nis­ing the need to en­sure safety and se­cu­rity of pay­ment sys­tem data, the Re­serve Bank of In­dia (RBI) in April 2018 had is­sued di­rec­tions to the pay­ment sys­tem oper­a­tors, re­quir­ing them to store all the pay­ment re­lated data in In­dia within a pe­riod of 6 months. The di­rec­tions were is­sued in or­der to gain unen­cum­bered ac­cess to all pay­ment data for su­per­vi­sory pur­poses, bet­ter mon­i­tor­ing and sur­veil­lance of the same and to re­duce the risk of data breaches.

RBI di­rected these sys­tem providers along with their ser­vice providers, in­ter­me­di­aries and third party ven­dors to en­sure that en­tire data re­lated to pay­ment sys­tems oper­ated by them should be stored on a server in In­dia. This data should in­clude the full end-to-end trans­ac­tion de­tails/in­for­ma­tion col­lected/car­ried/ pro­cessed as part of the mes­sage/pay­ment in­struc­tion. For the for­eign leg of the trans­ac­tion, if any, the data can also be stored in the for­eign coun­try, if re­quired. The com­pa­nies were re­quired to en­sure com­pli­ance and re­port the same to RBI, which shall be sub­ject to au­dit by the au­thor­i­ties.

Data pro­tec­tion bill

The RBI guide­lines were in ad­di­tion to the per­sonal data pro­tec­tion bill 2018 pro­posed in July this year. It is ex­pected to ad­dress the heftier is­sue of stor­age, pro­cess­ing and util­i­sa­tion of cus­tomer data by tech-driven com­pa­nies and on­line ser­vice providers. The bill has been drafted with the aim to tighten con­trols on the data that com­pa­nies col­lect from its cus­tomers and to en­hance in­di­vid­ual rights with re­spect to their per­sonal data. Ev­ery data fidu­ciary is re­quired to store at least one copy of per­sonal data on a server or data cen­tre that is lo­cated in In­dia. This may en­tail huge op­er­a­tional costs for the fidu­cia­ries and may even up­surge com­pli­ance bur­den on com­pa­nies.

Tax & new rules

Apart from the above im­pli­ca­tions, an­other an­gle of the pro­posed bill, which is also the cause of un­rest among com­pa­nies, is that data lo­cal­i­sa­tion may bring more for­eign com­pa­nies un­der the tax net. Un­til now for­eign com­pa­nies ex­ploited lo­cal mar­ket data with­out pay­ing taxes as they didn’t have phys­i­cal pres­ence. As per the in­ter­na­tional tax laws in this re­gard, an en­tity can be taxed on its busi­ness in­come in In­dia only if it has a ‘per­ma­nent es­tab­lish­ment’ (PE) in In­dia. Mod­ern tech­nol­ogy has made it pos­si­ble for many com­pa­nies to do busi­ness in sev­eral coun­tries with­out con­sti­tut­ing a PE. As a re­sult, it has been es­tab­lished in var­i­ous judg­ments that host­ing of lo­cal servers in In­dia would make it pos­si­ble to as­sert the ex­is­tence of a ‘fixed place of busi­ness in In­dia’, thereby at­tract­ing the tax­a­tion pro­vi­sions by virtue of be­com­ing a PE. For in­stance, in the fa­mous case of Master­Card, the au­thor­ity for ad­vance rul­ings (AAR) held that Master­Card Asia Pa­cific con­sti­tuted a fixed place PE in In­dia as its in­ter­face pro­ces­sors, re­quired to carry out sig­nif­i­cant trans­ac­tions, were lo­cated in In­dia, and were at the dis­posal of for­eign en­tity.

En­ti­ties may take the ser­vices of cloud com­put­ing net­works in­stead of main­tain­ing their own in­fra­struc­ture for the pur­poses of stor­ing data, to avoid cre­ation of a PE, how­ever, they can’t es­cape from fall­ing into the tax net, ow­ing to the in­tro­duc­tion of the new con­cept of ‘sig­nif­i­cant eco­nomic pres­ence’ hav­ing tax con­se­quences.

‘Sig­nif­i­cant eco­nomic pres­ence’ is a con­cept that was in­tro­duced by the Fi­nance Act 2018 mak­ing use of op­tion pro­posed by OECD on BEPS. The ex­is­tence of a sig­nif­i­cant pres­ence en­tails tax li­a­bil­ity. Whether the non-res­i­dent has place of busi­ness in In­dia or not, has now be­come ir­rel­e­vant. A non-res­i­dent will con­sti­tute a sig­nif­i­cant eco­nomic pres­ence in In­dia if the non-res­i­dent re­ceives rev­enue ex­ceed­ing a pre­scribed amount, for trans­ac­tions car­ried on within In­dia, or if the non-res­i­dent sys­tem­at­i­cally and con­tin­u­ously so­lic­its busi­ness in In­dia through dig­i­tal means or if the non­res­i­dent en­gages in in­ter­ac­tion with users in In­dia through dig­i­tal means. Thought the thresh­olds have not yet been pre­scribed, data lo­cal­i­sa­tion shall surely help in track­ing vol­ume of ac­tiv­i­ties of these non-res­i­dents in In­dia.

The road ahead

Data lo­cal­i­sa­tion would make it eas­ier for the in­come tax au­thor­i­ties to keep track of the vol­ume, fre­quency & reg­u­lar­ity of trade in In­dia, thereby mak­ing it sim­pler for au­thor­i­ties to de­ter­mine whether the busi­ness of an en­tity crosses the thresh­old for es­tab­lish­ing sig­nif­i­cant eco­nomic pres­ence in In­dia.

It’s thus clear that data lo­cal­i­sa­tion may have sig­nif­i­cant im­pacts, not only with re­spect to data pro­tec­tion, but also in the area of tax­a­tion. A mul­ti­tude of for­eign head­quar­tered en­ti­ties may now have to pay taxes if they store their data on servers in In­dia. While it may be a wel­come re­lief for lo­cal firms, the new en­trants will now have to re­trace their busi­ness strate­gies and ar­range­ments around the new laws of the land. Fur­ther, the sur­feit of data that shall be avail­able to the gov­ern­ment, if the pro­posed bill is en­acted, might be used to the ad­van­tage of the in­come tax au­thor­i­ties to check tax eva­sion, track fi­nan­cial ac­tiv­i­ties and iden­tify the mag­ni­tude of ac­tiv­i­ties con­ducted in In­dia.

The per­sonal data pro­tec­tion bill 2018 and the RBI di­rec­tions were surely aimed at main­tain­ing a healthy, ro­bust and digi­tised econ­omy by en­sur­ing the safety and se­cu­rity of data and its con­tin­u­ous scru­tiny. But who could have thought that a sim­ple data pro­tec­tion law could have tax im­pli­ca­tions as well. It may be too early to con­tem­plate the ex­act tax an­gle, since the na­ture, ex­tent and type of con­trol is still un­der con­sid­er­a­tion but the pos­si­bil­ity can’t be ruled out that this may lead to a wider tax base.

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