International payment companies like Visa, Mastercard and American Express now may have to pay around 15% tax on their India income. This may happen as they set up servers locally to comply with a central bank directive on data storage.
The Reserve Bank of India had ordered payments companies to locally store data on all transactions taking place within India from October 15. Visa, Mastercard and American Express mentioned that they had taken steps to comply with the regulation.
At present, all these companies are out of the tax net in India, as they do not have a ‘permanent establishment’ in the country. The companies work and offer their services here through offices in jurisdictions such as Singapore and store data on servers located in countries like the US and Ireland.
As soon as they move their servers to India, the companies will be seen as having a permanent establishment here, triggering domestic taxes.
“As per tax treaties India has with various countries, the server on which a website or data or software is stored and through with it is accessible is a piece of equipment having a physical location. Such location can be considered as a fixed place of business of the enterprise that owns or leases and operates the server,” said Dilip Lakhani, a tax expert.
However, most of the major payment companies are already looking at ways to deal with the likely tax implication. On the other hand, there could be other tax implications as well.
Tax implication over the RBI circular may be a beginning to a bigger worry that many other companies may also face. India is looking to bring in a data protection law whereby domestic data must be stored on servers located in India.