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Tax authorities can argue that having a nodal officer means that a particular company has a permanent establishment in the country — and hence its income is taxable as any other company

Currently, the tech giants do not have to pay corporate taxes on their income from India which may range from 25% to 40%. They only attract an 8-10% tax incidence

The tech giants are planning to argue in court that they cannot be forced to pay a tax because of appointing a compliance officer as they do not need a physical presence in the country to run their operations smoothly

US technology giants like Google, Facebook and Twitter might have to shell out higher taxes if they comply with the new Information Technology Rules, according to a report by ET.

The provision in the IT Rules that mandate the appointment of local nodal officers has been a bone of contention between the central government and the tech giants. This might take a turn towards taxation as tax authorities can argue that having a nodal officer means that a particular company has a permanent establishment in the country — and hence its income is taxable as any other company.

Currently, the tech giants do not have to pay corporate taxes on their income from India which may range from 25% to 40%. They only attract a tax incidence of around 8-10% via the recently mandated equalisation levy of 6% and an additional digital transaction tax of 2%. 

This is because the companies claim that they do not have a physical presence in the country. In most cases, income tax is paid by an Indian entity, which can be typically defined as a captive and only charges fees or margins from the foreign subsidiary, the ET report said. Tax is merely levied on fees charged by the Indian entity.

The tech giants are planning to argue in court that they cannot be forced to pay a tax because of appointing a compliance officer as they do not need a physical presence in the country to run their operations smoothly. It is only because of the government’s compliance mandate that they are appointing such officials in the first place.

Meanwhile, the United Nations Special Rapporteurs have written to the Government of India expressing concerns about the newly notified IT Rules, 2021, and asked it carry out a detailed review, and consult with all relevant stakeholders.

Appointed by the Human Rights Council of the UN, these rapporteurs or mandate-holders act independently of governments and play an important role in monitoring sovereign nations and democratically elected governments and policies.  In a communication sent to the government on June 11, these rapporteurs expressed “serious concerns” with certain parts of the legislation, and said that “due diligence obligations” placed on intermediaries may lead to “infringement of a wide range of human rights”.

The new intermediary rules or IT rules impact the way users interact with social media platforms and raise the compliance burden on those companies. Apart from them, OTT video streaming and digital publishers are also expected to comply with the new IT laws. Non-compliance with the new law means that any platform will no longer hold the intermediary status, and hence those companies can be tried under various legal provisions of the IT Act.