Tax implications of cloud computing, and everything as a service, IT News, ET CIO
Cloud computing has made rapid strides over the years and witnessed tremendous growth. While the global cloud business is estimated to grow at a CAGR of 16.5% and reach $345 Billion by 2022, the Indian cloud computing market which was $2.5 Billion in 2018, looks more optimistic and is expected to grow at a CAGR of 30%, to become $7.2 Billion by 2022. Further, 70% of the revenue of Indian SaaS players is from exports. Key attributes of cloud computing models are on-demand provisioning, reduction in duplicity, virtual environment with almost no use of hardware, very less capex, etc.
Cloud computing services can be categorised under three heads, viz., Software as a Service (‘SaaS’), Platform as a Service (‘PaaS’) and Infrastructure as a Service (‘IaaS’).
SaaS is a software distribution model, under which the software application is hosted by the service provider and made available to customers over internet on subscription basis. India is one of the fastest growing SaaS markets in the world, estimated to grow at a CAGR of 36% to reach approximately $2.4 Billion by 2022. Globally, as well as in India, SaaS has the largest market size compared to other cloud computing services.
Under PaaS model,a PaaS provider usually hosts the software and hardware on its own infrastructure to provide all the facilities that are required to support the life cycle of building and delivering web applications and services.
IaaS provides a standardised way of acquiring computing capabilities over web. Such resources include network, electronic storage, virtual servers etc. IaaS helps in the delivery of computer infrastructure as a web-based service which helps companies in cutting down investment in costly infrastructure.
In recent years, data center supply ecosystem in India has expanded exponentially. Such growth in data centers is also the result of data localisation regulations which require data of Indian customers to be stored locally/ restricts data transfer outside Indian borders. IaaS is expected to grow at a CAGR of 25% to reach $2.3-2.4 Billion business by 2022.
Currently, in India, the market share ratio of SaaS, IaaS and PaaS is 50:40:10.
In this context, it is important to take a closer look at the key tax issues impacting cloud computing.
- Usage of cloud computing services could be termed as usage of ‘software/equipment’. This has resulted in debate on taxability of such cloud computing services. The taxpayers have been adopting a position that by provision of such services, no copyright or equipment is being provided. Whereas, tax authorities have been treating payment for cloud computing services as ‘royalty’. The matter is pending before the Supreme Court and is yet to attain finality.
- Equalisation Levy (‘EL’) provisions for non-resident e-commerce operators, which are applicable from 1 April 2020,would impact overseas Cloud Service Providers (‘CSP’) players, as the basic premise of cloud services is online provision of services. The EL provisions applicable from 1 April 2021 exempt amounts from income-tax that have been subjected to EL. Considering that the exemption provisions are applicable from 1 April 2021, it has to be analysed if there would be double taxation for overseas CSPs for FY 2020-21, i.e. whether both income tax by treating the payments as ‘royalty’ and EL of 2% will be chargeable.
- Significant Economic Presence (‘SEP’) provisions were introduced to widen the scope of ‘business connection’, in order to bring those non-residents, not having physical presence in India but who receive consideration in excess of prescribed threshold (yet to be notified), from Indian customers, in respect of goods or services provided remotely, within its ambit. Once the thresholds are notified and the SEP provisions come into force from FY 2021-22, the non-resident CSPs would be required to monitor the sales to Indian customers. Owing to the broad coverage of the concept of SEP and EL, the interplay between both the provisions would need to be examined.
- Non-resident CSPs, planning to have data center in India, could face the risk of constituting a Permanent Establishment (‘PE’)/ business connection in India. They would need to examine their assets/ activity profile in India, to determine/ assess the risk.
Digital taxation continues to be an evolving concept and there still continue to be multiple tax issues surrounding cloud computing. One can only hope that with continued implementation of the BEPS initiative, there would be greater clarity from the government on digital tax policy, which would help taxpayers avoid needless litigation.
The authors are Tapati Ghose, Partner with Deloitte India, Vijai Jayaram, Director at Deloitte Haskins & Sells LLP, and Rohit Lal, Manager, Deloitte Haskins & Sells LLP.