The committee on taxation of e-commerce has recommended equalisation levy of 6-8 per cent on a wide array of digital services, which if accepted may widen the ambit of the levy beyond the business-to-business (B2B) transactions detailed in the Budget for 2016-17.
The committee has recommended equalisation levy should be chargeable on any sum that is received by a non-resident from a resident in India or a permanent establishment in India as a consideration for the specified digital services. The specified digital services include download of online music, online movies, online games, online books or online software, online news, online search, online maps or global positioning system applications among others.
The specified services also include designing, creating, hosting or maintenance of website, digital space for website, advertising, emails, online computing, blogs, online content, online data or any other online facility and any provision for uploading, storing or distribution of digital content.
In the Budget 2016-17, finance minister Arun Jaitley had proposed equalisation levy of 6 per cent in order to tap tax on income accruing to foreign e-commerce firms from India. The levy, which is being popularly called ‘Google tax’, has been proposed on payment to a non-resident, who does not have a permanent establishment, exceeding in aggregate Rs 1 lakh in a year, for online advertisement. The levy will only apply to B2B transactions. The suggestions of the panel, which had submitted its report in February, is based on report of Base Erosion and Profit Shifting (BEPS), which was earlier accepted by G20 and Organisation for Economic Cooperation and Development (OECD). The committee has suggested that this levy should not be a part of the Income Tax Act.
Though experts said the imposition of levy is a move towards taxing the digital economy in line with the global BEPS project, the manner in which the levy is being imposed, especially in cases where the foreign company does not have a permanent establishment and enjoys treaty protection could be challenged in courts.
“Overriding of tax treaties by unilateral act on the part of the Union Government, through amendment of domestic tax laws may not have the blessings of the Constitution, apart from the same being in violation of the guidelines of the Vienna Convention of Tax Treaties, though India is not one of its signatories. It is expected that significant deliberation would take place within the Union Government before enactment of the Finance Bill, 2016, in order to ensure that “equalisation levy” would be introduced in a manner that it adheres to its authorities under the Constitution,” Rahul K Mitra, partner, national head, BEPS & tax dispute resolution, KPMG India said.
Rakesh Jariwala, tax partner — media & entertainment, EY said: “The government has provided rationale for taxing digital economy transactions and it seems that government will seek to tax a wide range of digital economy transactions under EQL (currently online advertising supply chain and other services through notification in future). It is therefore imperative that the government not only lays down clear guidelines around the transaction covered under the levy but equally, the manner of determination as to whether EQL or income tax will apply on a transaction. Else the transaction could lead to double taxation — EQL as well as income tax. It is important that the government takes a consultative approach before making EQL effective.”
The report has said that India is committed to the obligations made by it under the tax treaties, which largely limit the application and effectiveness of adopting these options in the Income Tax Act, 1961. “These limitations, however, do not limit the adoption or application of the third option, i.e. ‘Equalisation Levy’ unless it is levied on ‘income’ that may fall within the scope of taxes covered under the tax treaties,” it said.
The committee has also suggested “it would be preferable to limit the application of equalisation levy only to B2B transactions, and not apply it to the business-to-consumer (B2C) transactions, which are more frequent, but of smaller amounts, at this stage, or till that point of time when a mechanism becomes available, by which equalisation levy can be seamlessly collected in B2C transactions, without burdening the consumer.”