Intermediary Guidelines: Compliance Challenges, Tax Surprise And Encryption Concerns
People use a smartphone in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Intermediary Guidelines: Compliance Challenges, Tax Surprise And Encryption Concerns

Social media platforms, digital news publishers and streaming services have to up their due diligence and accountability game in India given the new, stringent provisions in the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules 2021 notified by the central government last week.

Under these new guidelines or rules, the standard is higher for internet platforms who have more than 50 lakh registered users as the new rules categorise them as a ‘significant social media intermediary’. Within the next three months, such platforms will have to appoint a resident as:

  • Chief Compliance Officer who will be responsible and liable for ensuring compliance with the Information Technology Act and rules.
  • Nodal Contact Person for 24x7 coordination with law enforcement agencies.
  • Resident Grievance Officer to address user complaints.

Such platforms will need to have a physical address in India. They’ll also have to publish a monthly compliance report mentioning the details of complaints received and action taken, as well as details of contents removed proactively.

Supratim Chakraborty, partner at Khaitan & Co. told BloombergQuint that the periodicity of publishing this report is impractical.

This kind of periodicity is impractical to my mind because on ground when players prepare these, they have to really look at what needs to go out, what cannot be published, what is the data that can be shared, what perhaps needs to be sifted out. So, this kind of a monthly requirement is an uphill task. 
Supratim Chakraborty, Partner, Khaitan & Co.

Chakraborty also spoke about how social media platforms, streaming services and digital news publishers will have to prepare to comply with new provisions under these rules, such as deploying technology tools to filter malicious information, setting up mechanisms to comply with the Code of Ethics and applying discretion to the content they host or stream.

Details in the interview here.

Besides onerous compliance, the rules could have unintended consequences when viewed from a tax lens.

The requirement of employing resident officers in India and having a physical office in India could amount to a business presence in the country and potentially lead to a tax liability, Dhruva Advisors’ partner Ajay Rotti told BloombergQuint.

An important tax issue that countries around the world have been grappling with is the concept of nexus, Rotti pointed out. Some of these new age companies have all along taken a position that they don’t have a presence in any country and thereby do not create a nexus for the purpose of tax, he explained.

Now suddenly the rules require these platforms to have employees in India, have offices at their disposal. Does that create a sufficient nexus under existing tax laws for them to have a taxable presence, what would be the taxation—is all something that we’d have to see, but things will not remain the same because they will now have offices and employees in India.
Ajay Rotti, Partner, Dhruva Advisors

Rotti also detailed the consequences intermediaries will face if the tax department does take this approach.

Watch the full interview here.

Another big concern that the new rules have thrown up relates to encryption policies of messaging platforms.

The new guidelines say that if a messaging platform has more than 50 lakh registered users in India, it will have to enable identification of the first originator of the information for the purposes of

  • Prevention, detection, investigation, prosecution or punishment of an offence related to sovereignty and integrity of India, the security of the State, friendly relations with foreign States, or
  • Public order, or of incitement to an offence relating to the above, or in relation with rape, sexually explicit material or child sexual abuse material punishable with imprisonment for a term of not less than five years.

Raman Chima, Asia policy director at Access Now told BloombergQuint that this provision in the guidelines is ripe for a court challenge.

It will directly impact the fundamental rights to freedom of speech, expression, online association, and assembly with measures that would encourage over-censorship by web platforms, and harm secure communications by requiring encryption to be broken in order to ensure “traceability of communications”.

Watch the full interview here.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.