A large part of the income generated by these companies in India is outside the domestic tax net as they did not have a PE here. PE is a concept in the tax regulations that determines which country has the right to tax a company – and to what extent.
Tax experts say that as soon as the payment companies set up servers locally to comply with the Reserve Bank of India (RBI) directive on data storage, they have ended up creating a PE here.
The tax outgo could now be around 25% on the entire revenue they generate from the country, say tax experts.”The way the regulatory environment is evolving in India, more companies will start coming under the domestic tax net. Going ahead, payment companies like MasterCard, Visa and American Express will have to maintain Indian data on servers based here; this will create a PE here and could lead to domestic taxes at 25%,” said Girish Vanvari, founder of tax advisory firm Transaction Square.
MasterCard said it will adhere to the data localisation rules in letter and spirit, while Visa and American Express did not respond.
“Since the RBI’s 2018 directive on data localisation and storage was issued, we have worked closely with the RBI and Indian government to ensure we are compliant with both the letter and the spirit of the order,” the company said. “We have invested heavily in setting up our global technology hubs in India and bringing value-added services like fraud mitigation and cybersecurity to the market.”
Global card companies were out of the tax net in India as they operated here through offices in jurisdictions such as Singapore and stored data on servers located in countries such as the US and Ireland. Their revenues were taxed as per the tax treaties India had with these countries. Some of the payment companies are already fighting the revenue department over this issue – of taxation and a local PE.
“With localisation, the control shifts to the Indian government and regulator. This will have implications on tax liabilities on these entities. It was found out that a lot of foreign entities were processing data outside of India and authorities were not comfortable with domestic data going outside and being stored on their servers,” said Ashvin Parekh of Ashvin Parekh Advisory Services.