While India is one of the hotbeds for Cloud computing related services, the taxation rules aren’t yet clearly defined. The possible taxation rules depend whether one is providing SaaS, IaaS or PaaS services.
Though nothing changes for resident cloud service providers (global net income from such transactions would be liable to tax in India at normal tax rates), non-resident cloud service providers’ taxability depends on how income is characterized. (i.e., whether the income is royalty or fees for technical services) and whether the service provider has a taxable presence in India (i.e., whether the service provider has a permanent establishment in India).
As per KPMG report, Royalties or fees for technical services are generally taxed on a source basis ( i.e., the non-resident service provider is liable for tax in India if the payer is an Indian resident – subject to certain exceptions – even though the services are provided from outside India. In some cases, a payment of royalty or fees for technical services between two non-residents (one being a service provider and the other being a service recipient) could also be subject to taxation in India, provided the recipient is using these services to carry on a business in India or to earn any income from a source in India.
Transactions for SaaS, PaaS and IaaS Services
SaaS: According to the favorable rulings, payment for access/use of off-the-shelf software (without any right to use/access the copyright therein) is essentially a use of a copyrighted article. Therefore this payment is not a copyright and does not qualify as a royalty.
IaaS: In case of Iaas (Infrastructure as a Service), the customer uploads data onto the cloud service provider’s infrastructure and monitors the software and data remotely. In such a case, since the customer uses the computing infrastructure and also has control over it, the payment may be characterized as a royalty as it is for the use of equipment.
PaaS: In the case of PaaS, a customer uses service provider’s infrastructure, the domestic tax law (under the Fiscal Budget 2012) qualifies PaaS as a process and consequently be taxable as a royalty.
As far as indirect taxes are concerned, it depends whether the cloud service is classified as a service (i.e. 12.36% service tax) or transfer of right to use property, in which case it will be dependent on state government tax which varies from 5% to 15%).
What’s your take on taxation rules for cloud services in India?