Tax treatment for cloud computing needs scrutiny, says law firm
Kripa Raman
Share · print · T+ Mumbai, Oct. 17:
It may be difficult to arrive at any concrete conclusion on the
appropriate tax treatment of new business models like cloud computing
involving multiple (and intricately connected) features or
transactions, says a note on cloud computing issued by law firm
Nishith Desai Associates.
New phenomenon
Although e-commerce taxation has been rapidly evolving in India, cloud
computing, being a relatively new phenomenon, has neither been tested
by the Courts nor scrutinised by the Indian tax authorities, the note
says.
In certain situations, an argument may be raised that payments for
certain forms of cloud computing services may be classified as fees
for technical services, the tax implications of which are similar to
that of royalty, the note says.
But in standard structures where the client does not exercise any
control over the cloud server and merely procures certain platform,
infrastructure or support services, the consideration paid to a
foreign service provider should normally be treated as business
profits. This would be taxable in India only if the service provider
has a permanent establishment (PE) in India, says the note.
Royalty
In the case of e-commerce, the tax authorities have been adopting a
position that the income received by foreign service providers in most
service models is in the nature of royalties. Hence, they would
attract a withholding tax in India at the rate of around 10 per cent.
However, if it is characterised as business profits, such income would
be taxed in India only if the foreign entity has a PE or a business
connection in India, the note points out.
Under the Income Tax Act, the definition of royalty covers both
consideration paid for the right to use certain IP rights (such as
copyrights, patents, secret formulae etc) and the right to use
scientific equipment.
A similar definition appears in several tax treaties signed by India.
From a broad analysis of this definition, it may be possible to
interpret it in a manner that would cover a number of cloud computing
models, says the note from Nishith Desai.
Direct taxes code
The impact of the new Direct Taxes Code proposed to replace the
Information Technology Act from 2012, on new age technologies such as
cloud computing would also have to be carefully examined, says the
note. For instance, the draft DTC seeks to tax technical services
rendered to an Indian resident even if the services are not rendered
in India.
“From a policy perspective, it is necessary for law-makers to ensure
that tax and other regulatory factors do not act as an impediment to
the growth of innovation and technology,” says the note.
As the Indian tax authorities and Courts grapple with the tax
implications of emerging e-commerce models, it is necessary to arrive
at solutions that further the principle of neutrality in the tax
treatment of e-commerce and ordinary commerce, said the note.
Cloud computing is the practice of the offer of hardware, software
and tools by third parties or cloud service providers. The client may
not own the hardware software or tools but pay for them based on
usage.
Kripa Raman
Share · print · T+ Mumbai, Oct. 17:
It may be difficult to arrive at any concrete conclusion on the
appropriate tax treatment of new business models like cloud computing
involving multiple (and intricately connected) features or
transactions, says a note on cloud computing issued by law firm
Nishith Desai Associates.
New phenomenon
Although e-commerce taxation has been rapidly evolving in India, cloud
computing, being a relatively new phenomenon, has neither been tested
by the Courts nor scrutinised by the Indian tax authorities, the note
says.
In certain situations, an argument may be raised that payments for
certain forms of cloud computing services may be classified as fees
for technical services, the tax implications of which are similar to
that of royalty, the note says.
But in standard structures where the client does not exercise any
control over the cloud server and merely procures certain platform,
infrastructure or support services, the consideration paid to a
foreign service provider should normally be treated as business
profits. This would be taxable in India only if the service provider
has a permanent establishment (PE) in India, says the note.
Royalty
In the case of e-commerce, the tax authorities have been adopting a
position that the income received by foreign service providers in most
service models is in the nature of royalties. Hence, they would
attract a withholding tax in India at the rate of around 10 per cent.
However, if it is characterised as business profits, such income would
be taxed in India only if the foreign entity has a PE or a business
connection in India, the note points out.
Under the Income Tax Act, the definition of royalty covers both
consideration paid for the right to use certain IP rights (such as
copyrights, patents, secret formulae etc) and the right to use
scientific equipment.
A similar definition appears in several tax treaties signed by India.
From a broad analysis of this definition, it may be possible to
interpret it in a manner that would cover a number of cloud computing
models, says the note from Nishith Desai.
Direct taxes code
The impact of the new Direct Taxes Code proposed to replace the
Information Technology Act from 2012, on new age technologies such as
cloud computing would also have to be carefully examined, says the
note. For instance, the draft DTC seeks to tax technical services
rendered to an Indian resident even if the services are not rendered
in India.
“From a policy perspective, it is necessary for law-makers to ensure
that tax and other regulatory factors do not act as an impediment to
the growth of innovation and technology,” says the note.
As the Indian tax authorities and Courts grapple with the tax
implications of emerging e-commerce models, it is necessary to arrive
at solutions that further the principle of neutrality in the tax
treatment of e-commerce and ordinary commerce, said the note.
Cloud computing is the practice of the offer of hardware, software
and tools by third parties or cloud service providers. The client may
not own the hardware software or tools but pay for them based on
usage.
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