Tax Demands on Foreign SaaS Firms: FTS and Double Taxation
Why in the news
Large foreign software-as-a-service providers received new tax orders from India’s Income Tax Department, setting up a possible fight over how their income should be classified.
Key facts
- Firms: Microsoft, Amazon, Google, Oracle, IBM and Salesforce; FY 2021-22 and 2022-23.
- Classification: revenue from Indian customers treated as Fees for Technical Services (FTS), taxed at 15% under the India-US DTAA.
- Issue: double taxation, as many firms already paid the equalisation levy and no mechanism exists to claim credit.
- Status: orders issued; neither companies nor the CBDT had responded formally.
Equalisation levy
- Introduced in 2020 on non-resident e-commerce operators with big Indian user bases but no physical presence.
- Meant as a backstop where income tax rules and tax treaties could not be applied.
- The government committed to phase it out by August 2024.
Royalty versus FTS
| Point | Detail |
|---|---|
| Before 2021 | Similar payments generally treated as royalty |
| 2021 Supreme Court ruling | Standard off-the-shelf software payments are not royalty (Engineering Analysis case) |
| Department’s new view | SaaS automates work that people would do, so it may be a technical service |
| Experts’ view | Standardised, automated SaaS with no IP transfer is neither royalty nor FTS |
| Treaty angle | US, UK and Singapore treaties define FTS narrowly, helping the firms |
Implications
- Fresh scrutiny of cross-border digital services; effect on compliance and pricing.
- Litigation likely unless CBDT issues clear guidance.
Exam angle
- Terms: SaaS, equalisation levy, FTS, DTAA, CBDT.
- Levy introduced in 2020; phase-out target August 2024.