The authority to levy and collect taxes in India is enshrined under Article 265 of the Constitution of India, which states that “no tax shall be levied or collected except by the authority of law”. The term ‘tax’ has been defined by the Supreme Court in Krishi Upaj Mandi Samiti v. Orient Paper & Industries Ltd 1995 SCC (1) 655 as:
“tax is a compulsory extraction of money by public authority for public purposes enforceable by-laws and is not payment for services rendered. There is no quid pro quo between the taxpayer and the public authority. It is a part of the common burden and the quantum of imposition upon the taxpayer depends generally upon his capacity to pay.”
Taxation in India can be broadly divided into two categories depending upon the manner of their payment, namely Direct Tax and Indirect Tax. Direct Taxes are paid directly to the Government by the taxpayer, under the Income Tax Act, 1961 (“ITA”). Income Tax is levied on various forms of income earned by the taxpayer, subject to few exceptions.
Indirect Taxes are consumption-based taxes levied on the purchase of goods or receipt of services, which are not paid directly to the Government. The concerned legislation for Goods and Services Tax (“GST”) is the Central Goods and Services Tax Act, 2017 (“CGST Act”) and similar state enactments.
Financial technology, more commonly known as ‘FinTech’, refers to the innovations in technology which enable the provision of financial transactions or services by an entity through a digitized platform. FinTech companies have emerged in India as evolved, consumer-centric financial services providers distinct from the traditional banking sector.
This Blog shall discuss and elaborate upon the implications of Direct and Indirect Taxes on FinTech companies, analyzing the various rates of taxes applicable on such companies.
DIRECT TAX IMPLICATIONS ON FINTECH COMPANIES
I. Corporate Income Tax
Within the FinTech industry, many FinTech entities register as a company under the Companies Act, 2013 to ensure sound compliance with all the applicable laws. An incorporated company is included within the definition of “person” under Section 2(31) of the ITA, and is thus subject to Income Tax.
Section 2(17) of the ITA defines the term ‘company’ as:
“(i) any Indian company, or
(ii) any body corporate incorporated by or under the laws of a country outside India, or
(iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922) or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or
(iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company.”
Accordingly, FinTech companies are subject to Corporate Income Tax under the ITA as either Domestic Companies under Section 2(22A) of the ITA or Foreign Companies under Section 2(23A) of the ITA.
The major difference between the taxation of a Domestic Company and a Foreign Company is the manner of computation of taxes. For a Domestic Company, tax is levied on every type of income, including its universal income which includes income earned within a foreign jurisdiction by the Domestic Company. However, for Foreign Companies, tax is levied only on the income earned within the jurisdiction of India.
Thus, Indian FinTech companies are subject to Corporate Income Tax on income generated within and outside India; whereas, foreign FinTech companies are subject to Corporate Income Tax only on the income generated within India.
The following incomes of a FinTech company are liable to be taxed under the ITA:
- Profit earned from business
- Capital Gains (earned from transfer of capital assets)
- Income from house property
- Income from other sources (such as interest income, royalty income).
Domestic FinTech Companies
The following Corporate Income Tax rates are applicable on Domestic FinTech Companies:
- If the Domestic Company does not claim any specified allowances, exemptions or deductions under the optional regime, the rate of tax shall 22% under Section 115BAA of the ITA.
- For all other Domestic Companies, the rate of tax shall be 30%.
Domestic FinTech Companies shall also attract Health and Education Cess of 4%, along with surcharge as specified below:
- When the total income exceeds Rs. 1 crore, but is less than Rs. 10 crores, a surcharge is applicable at the rate of 7%.
- When the total income exceeds Rs. 10 crore, a surcharge is applicable at the rate of 12%.
Minimum Alternate Tax (“MAT”): In case of Domestic FinTech Companies, if the total tax to be paid is less than 15% of the total book income of the FinTech Company, such companies shall be subject to MAT at the rate of 15% on book profits. However, MAT is not applicable on FinTech Companies opting to pay tax at the rate of 22% under Section 115BAA of the ITA.
Foreign FinTech Companies
The following rates of Corporate Income Tax are applicable for Foreign FinTech Companies earning income within the Indian jurisdiction:
- If the royalty received or the fees for technical services from the Government or any Indian concern under an agreement was made before 1st April 1976 and approved by the Central Government, the tax rate shall be 50%.
- Any other income of a Foreign FinTech Company should be taxed at 40%.
Surcharge is also applicable on the income of Foreign FinTech Companies, as specified below:
- When the total income exceeds Rs. 1 crore, but is less than Rs. 10 crores, a surcharge is applicable at the rate of 2%.
- When the total income exceeds Rs. 10 crores, a surcharge is applicable at the rate of 5%.
Health and Education Cess is also levied on Foreign FinTech Companies at the rate of 4%.
II. Equalisation Levy
Equalisation Levy is a form of direct tax under the Finance Act, 2016 which is levied on payments received by a non-resident service provider. The tax levied is to be withheld by the service recipient and paid directly to the Government.
Section 165A of the Finance Act, 2016 as amended by the Finance Act, 2020 has made applicable an Equalisation Levy at the rate of 2% on the amount of consideration received or receivable by an e-commerce operator, not having permanent establishment in India, from e-commerce supply or services made to Indian residents or non-resident companies having permanent establishment in India.
However, Equalisation Levy shall not be applicable where the sales, turnover or gross receipts of the e-commerce operator from the e-commerce supply or services is less than Rs. 2 crore in the previous year.
Section 164(ca) of the Finance Act, 2016 defines e-commerce operator as “a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both”. E-commerce supply or services as defined under Section 164(cb) of the Finance Act, 2016 includes “online provision of services provided by the e-commerce operator”.
A conjoint reading of both the definitions indicate that any Foreign Company engage in online provision of services through a digital platform to an Indian resident or non-resident company with permanent establishment in India shall be subject to Equalisation Levy. Thus, Foreign FinTech Companies providing online financial services through a digital platform to Indian recipients may attract an Equalisation Levy at the rate of 2%.
Alternatively, Domestic FinTech Companies serving as a digital payment intermediary between an Indian buyer and a non-resident seller/merchant are also liable to withhold Equalisation Levy from the amount payable to the foreign merchant.
INDIRECT TAX IMPLICATIONS ON FINTECH COMPANIES
FinTech companies provide financial services through digital platforms, which include digital lending, credit services, digital wallet, mobile banking, mobile payments, payment gateways, digital insurance, investment portfolios, payment solutions, etc.
Section 65(105)(zm) of the Finance Act, 1994 defines taxable services w.r.t financial services as:
“any service provided or to be provided to any person, by a banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern, in relation to banking and other financial services.”
The terms ‘Banking and Other Financial Services’ are defined under Section 65(12) of the Finance Act, 1994 as:
“a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern, namely:-
(i) financial leasing services including equipment leasing and hire-purchase;…
(iii) merchant banking services;
(iv) securities and foreign exchange (forex) broking, and purchase or sale of foreign currency, including money changing;
(v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services,
(vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy;
(vii) provision and transfer of information and data processing; and
(viii) banker to an issue services; and
(ix) other financial services, namely, lending, issue of pay order, demand draft, cheque, letter of credit and bill of exchange, transfer of money including telegraphic transfer, mail transfer and electronic transfer, providing bank guarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults, operation of bank accounts;
(b) foreign exchange broking and purchase or sale of foreign currency including money changing provided by a foreign exchange broker or and authorised dealer in foreign exchange or an authorised money changer, other than those covered under sub-clause (a)”
From the aforementioned definition of ‘Other Financial and relates services’, it can be inferred that the services provided by FinTech companies fall under the said definition. ‘Other Financial and relates services’ is subject to GST at the rate of 18% under Heading 9971. Thus, services provided by FinTech companies which are enlisted in Section 65(12) of the Finance Act, 1994 shall be levied GST at the rate of 18%.
Place of Supply: Section 13 of the CGST Act stipulates that the liability to pay GST on services arises at the time of supply of the service. Thus, the place of supply is essential to determine the applicability of GST.
For FinTech companies, determining the actual place of supply may be challenging as a digital payment platform of one FinTech company may be operated on by another FinTech company or other distinct entities. Thus, the place of supply has to be ascertained based on the entity receiving the supply of financial services in exchange for consideration.
FinTech companies are rapidly gaining prominence in the recent times as the preferred mode for obtaining financial services in a smooth and expeditious manner. This is further accelerated by the increased dependance on online activities due to the COVID-19 pandemic.
FinTech companies are legal entities, usually incorporated as a company under the Companies Act, 2013. As such companies also earn income from business profits, capital gains and so on, they are subject to Corporate Income Tax under the ITA at the prescribed rates. The Finance Act, 2016 also imposes an Equalisation Levy on consideration received by non-resident FinTech service providers.
FinTech companies are engaged in the provision of financial services falling under the Head ‘Other Financial and related services’. Thus, they attract GST at the rate of 18%. The place of supply of such financial services shall be carefully determined so as to ensure that GST is levied and collected under the appropriate State GST or Integrated GST along with the Central GST.
The Government has brought forth significant measures for the taxation of services provided through digital platforms. However, the need of the hour is to introduce specific provisions laying down the implications of tax on FinTech sector, in order to clarify doubts across the industry regarding the levy of taxes on FinTech companies, and the financial services provided by them.
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