Cloud Broadcasting And Key India Tax Conundrums

Cloud technology is transforming business models across the world and broadcasting sector is no exception to this.
Today, many broadcasters and media houses are launching their own applications or portals for direct delivery of content to consumers using cloud. Cloud broadcasting generally operates as Software as a Service (SaaS) model where the broadcaster gets access to remote software application via internet.

Broadcasters operating in cloud environment should be cognizant of withholding tax, GST, and other tax and regulatory obligations which could arise due to presence of service recipients and service/infrastructure providers in multiple jurisdictions. Considering that the cloud broadcasting business models are still evolving, one needs to be mindful of India tax aspects, since the tax cost can be significant (income-tax cost can range from almost 44 percent to NIL and Indirect tax/levy cost can range from 24 percent to NIL) in certain cases. Also, with the recently introduced digital taxes like GST on OIDAR services or Significant Economic Presence (SEP) concept under the India domestic tax laws, there is a need to assess India tax aspect before implementing a business model!

Income of cloud broadcasters from subscribers and payment to cloud service providers may be characterized as Royalty taxable at 10–15 percent, depending upon the business model of cloud broadcaster and the arrangement between cloud service provider and broadcaster. Factors like control/access over the cloud server hosting the platform, software, etc. or nature of access given to platform or software (standard or customized) licensed/transferred, etc. play an important role in determining the nature of payment and tax rate. Similarly, payment for use of specific data storage space on remote server for storage of content have been treated by tax office as equipment royalty taxable 10 — 15 percent, depending on the degree of control with broadcaster, transfer of possession of server, etc.

Cloud computing also raises Permanent Establishment (PE) concerns (with effective income tax rate of almost 44 percent) for the cloud service provider depending on the location of server, degree of control, employees visiting India, etc. Foreign broadcasters, content aggregator, or cloud service provider needs to be mindful of any potential PE exposure which may be alleged by tax authorities due to any India infrastructure arrangements. Recently, an Indian court while evaluating Equipment PE for a United States MNC held that an automatic equipment can also create a Fixed Place/Equipment PE if other tests (like disposal test, permanence test, etc.) are satisfied and ownership is not a relevant factor to determine such PE. Despite having no physical presence in India, cloud broadcasters delivering online content to the users in India may trigger SEP under the domestic tax law. SEP gives importance to the situs of buyer and it can be triggered based on the revenue generated and viewers/users from India.

Even transactions between a foreign broadcaster and foreign content/cloud service provider for India business operations could fall within the ambit of Indian domestic tax law by virtue of secondary source rule, if the purpose of such arrangement is to earn income from any source in India. Certain tax treaties entered by India (like India-United States tax treaty) also includes secondary source rule, thereby exposing India income to tax at 10–15 percent.

With the spate of new tax provisions being introduced by Indian government to tax the digital/online transactions, cloud transactions finds its place specifically within the OIDAR services introduced under GST regime. If cloud transactions qualify as OIDAR services, it could trigger GST related compliance for foreign companies dealing in such cloud transactions, specifically in B2C arrangements. Also, 6 percent Equalization Levy currently levied on only specified online advertisement services provided by the non -residents which can impact cloud broadcaster, could also cover cloud transactions in the foreseeable future.

Given the pace of growth of cloud based arrangements/business in India, it is expected that the Indian tax law aspects and the related jurisprudence would evolve and settle some of the tax interpretations over a period of time. Till such time, it is important to assess the tax cost and the compliance requirements to avoid any surprises!