LocalCircles’ request to Central Board of Direct Taxes:

Foreign companies with significant economic presence should invoice Indian customers from local entities and pay direct taxes in India

As the Indian SME & startup industry grows, their spend on using the services of companies like Google, Twitter, Linkedin etc. also keeps increasing. LocalCircles analysed invoices from many such companies and realised that most of these services are billed from foreign office of these large corporations.

Over the last few months, multiple online communities on LocalCircles have received posts & comments from consumers and small businesses (including startups) about the fact that many foreign companies operating in India, despite having significant revenues, users or paying customers in India, continue to invoice Indian consumers and businesses from their overseas office while their Indian entity is structured more like a service company or commission agent to the parent company located abroad. As a result, majority of the revenues are reported in the parent company while a very small portion of the service/commission revenue and income is reported in the entity registered in India.

In the case of Indian startups and SMEs, they are required to deposit 6% equalisation levy on behalf of the foreign companies which leads to an additional compliance and cost burden on the startups and SMEs. Since this is a levy, they are unable to claim Input Tax Credit for this cost incurred. While the startups and SMEs incur additional costs of the levy and its compliance, the Government also loses out on Income Tax collection in majority of the cases as the invoice is generated from a foreign country.

When LocalCircles asked startups and SMEs through a survey, what should be done with the Equalisation Levy, 82% of them said that Government of India must make billing from Indian offices of these foreign companies’ mandatory for customers in India. A total of 2582 startups and SMEs participated in this survey from across India.

LocalCircles believes that any company having sizable revenues or user base or paying customers in India must be required to invoice their customers in India from a registered entity in India. Based on consultations conducted with startups and SMEs on LocalCircles, it is proposed that if a global corporation has 1M citizens/users of India registered with them or has 100 paying customers (businesses or citizens) or annual revenues of over INR 10 crores from customers in India, they must be required to invoice all Indian customers from their India entity. Such a move will not only enable a fair playing field as far as competition goes for their Indian counterparts but also lead to increase in direct tax collection for the Government of India.

At the recent G-20 meet, Finance Minister Smt. Nirmala Sitharaman also advocated for the adoption of the "Significant Economic Presence" concept for taxing the profits made by foreign digital companies in India and LocalCircles is hopeful that the same will be included in the Direct Tax Code. LocalCircles is also sensitising different Government ministries who are forming various policies to be mindful of this and design policies that encourage local presence and invoicing.

About LocalCircles

LocalCircles takes Social Media to the next level and makes it about Communities, Governance and Utility. It enables citizens to connect with communities for most aspects of urban daily life like Neighborhood, Constituency, City, Government, Causes, Interests and Needs, seek information/assistance when needed, come together for various initiatives and improve their urban daily life. LocalCircles is free for citizens and always will be!

Akshay Gupta - media@localcircles.com, +91-8585909866

All content in this report is a copyright of LocalCircles. Any reproduction or redistribution of the graphics or the data therein requires the LocalCircles logo to be carried along with it. In case any violation is observed LocalCircles reserves the right to take legal action.

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