5 tax-policy measures to support "Digital India" mission
One of the highlights of Indian Prime Minister Narendra Modi's US visit has been an active promotion of "Digital India" movement. The speeches by tech giants on Saturday night at "Digital India Summit" reinforce the potential massive opportunity in this space in India. During the 'Townhall' at Facebook HQ on Sunday, the Indian Prime Minister candidly admitted that India certainly needs physical infrastructure but will also require digital infrastructure for future growth.
The vision of Digital India programme is to transform India into a digitally empowered society and knowledge economy. The program envisages three mission areas - 1) Digital Infrastructure as a Core Utility to Every Citizen; 2) Governance and Services on Demand and 3) Digital Empowerment of Citizens. Clearly, a significant investment will be required in each of these areas from Government and private sector (especially in the form FDI) to make Digital India mission a success. In fact, the approach and methodology for "Digital India Programme" specifically states that 'Public Private Partnerships would be preferred wherever feasible to implement e-Governance projects with adequate management and strategic control'.
The Digital India policy therefore needs to be dovetailed into different aspects of Government's framework. "Tax" policy clearly would need to be one of the key considerations for Digital India, especially to make PPP-model workable & make sure FDI continues to flow. However, our current income-tax law is not specifically aligned to support the ambitious 'Digital India' vision.
In my view, 5 major tax policy areas which will require Government's attention to bolster 'Digital India programme' are
1) Tax incentives for building 'i-ways' - The tax law currently provides incentives for Highway constructions, setting up of power transmission & telecom network. Sec 80-IA of the Income - tax Act provides deduction albeit with applicability of minimum alternate tax. A similar support would facilitate in lowering cost of building 'i-way' infrastructure across length & breadth of the country.
2) Digital India patent box - The Government's focus under Digital India coupled with 'Start-up India' program is to create an environment for new entrepreneurs. This would surely create 'innovation' & 'value' from the products & technologies built by the Indian entrepreneurs. Learning from experiences from West wherein IP and value thereon was artificially shifted out of the country to reduce the taxes, India could instead be competitive on tax policy side to support innovation within the country. It would augur well for the Government to support the innovation through 'Digital India patent box regime' & allow value creation within the country with moderate / low tax regime.
3) Simpler withholding taxes (B2B services) - Digital India initiative will require technology investment and support from overseas partners, resulting in outflow from the country. The Government has brought down WHT rate on foreign payments from 25% to 10%. However, there are a few factors which need more streamlining. India's quest for greater 'source' based taxation regime, 10% rate on "gross" value of payments, mandatory PAN requirement with a rider of 20% TDS & tax gross-up (where WHT is on Indian party's account), cumulatively increase the cost of building infrastructure required for Digital India. A rationalisation of these provisions especially for Digital India projects will be necessary.
I am not including here ease-of-making remittance (especially for technology service payments), which today still requires a prior certification from chartered accountant & hopefully this would be addressed under the initiative of "ease of doing business". India ofcourse must protect its tax base, but a more moderate regime of taxation which can be easily acted upon by the businesses would further push the Digital India mission.
4) Transfer pricing - making a new norm from APA + MAP learning - IT-sector has highest number of transfer pricing disputes in the country. However, recent experiences with APA and MAP regime has created a lot of positive sentiment among taxpayers as well as Revenue. As this process matures in the coming months, India should translate learning from MAP + APA (especially entity characterization and profit margins) into a more acceptable "safe harbour". This would further assist in reducing the TP disputes and yet make sure that fair share of revenues in global value chain get taxed in India.
5) Digital Economy taxation (B2C transactions) - The success of Digital India programme is going to lead to even greater B2C (business to consumer) transactions in India, which again raises issues on tax revenues. The tax issues are not restricted only to cross border transactions but even transactions that take place within India. India here is not the only country grappling with taxing B2C transactions taking place via internet. OECD as a part of its Base Erosion and Profit Shifting (BEPS) project has identified 'taxing digital economy' as one of the key areas. India is fully on board on this project & hopefully OECD's announcements on Oct 5th will provide a direction. Indian Government however should act quickly to implement these recommendations rather than leaving it to the interpretation under existing law (under current Sec 5 & 9).
All the comments above are from corporate income-tax perspective. Indirect taxes will also play a critical role in Digital India and surely needs a equal focus.
It will be interesting to see how Union Budget 2016 considers specific tax policy on Digital India, which will provide further impetus to Digital India movement.