Global payments companies such as Visa, Mastercard and American Express may have to pay around 15% tax on their India income as they set up servers locally to comply with a central bank directive on data storage.
The Reserve Bank had ordered payments companies to locally store data on all transactions taking place within India from October 15. Visa, Mastercard and American Express said they had taken steps to comply with the regulation.
These companies are currently out of the tax net in India, as they do not have a ‘permanent establishment’ in the country — they operate here through offices in jurisdictions such as Singapore and store data on servers located in countries like the US and Ireland. Permanent establishment, or place of business, is a concept in taxation that determines where an organisation is required to pay tax.
Servers on Rent
After they move servers to India, the companies will be treated as having a permanent establishment here, triggering domestic taxes, said experts.
“As per tax treaties India has with various countries, the server on which a website or data or software is stored and through with it is accessible is a piece of equipment having a physical location. Such location can be considered as a fixed place of business of the enterprise that owns or leases and operates the server,” said Dilip Lakhani, a tax expert.
While the corporate profit of Indian companies is taxed at 30%, these payment companies may be taxed at about 15%, the rate levied on companies that have invested in India through their arms in countries like Singapore with which India has tax treaties.
Most of the major payment companies are already looking at ways to deal with the likely tax implication, said people in the know.
“While the tax outgo for payment system providers would go up if they set up their own servers in India, most companies may either set up a separate special purpose vehicle or just use the servers of an unrelated Indian company,” said Jeenendra Bhandari, partner at advisory firm MGB. The payment company will use the servers by paying a rent so that there will be no permanent establishment, he added.
But this doesn’t mean there will be no taxation. “Definitely having servers in India would have tax implications in India and will be an unintended outcome of this rule,” said Bhandari.
Mastercard did not respond to ET’s queries. Visa and American Express said they had submitted plans to comply with the regulations to the central bank, while the RBI didn’t respond to an email seeking comment.
“On data localisation, Visa has completed the key requirement of storing its Indian data locally and is equipped to facilitate regulatory access to payment transaction data of Indian cardholders. We are currently implementing our solution in line with our plan submitted to the RBI,” said a Visa spokesperson.
“Compliance with local laws and regulations is a top priority for us in all the countries we operate in. We confirm that we have submitted a report to the RBI detailing our approach to comply with the directive,” said Vibha Bajaj, head of public affairs and communications at American Express India.
There could be other tax implications as well. In the past, Mastercard was embroiled in a dispute with the tax department over whether its India income could be taxed. As per a June order of the Advance Authority of Ruling, some portion of the fees paid by customers to the Indian arm of the company should be treated as royalty and taxed domestically.
Tax implication over the RBI circular may be a prelude to a bigger worry that many other companies such as Google and Apple may face. India is looking to bring in a data protection law whereby domestic data must be stored on servers located in India.
Source : Times of India