Introduction of the Levy
On February 29, 2016, while counting his numerous achievements in comparison to the last three years of the previous Government, Hon’ble Finance Minister Mr. Arun Jaitley introduced in The Finance Bill, 2016 a levy on E-Commerce companies. The levy was introduced with the following words:
“In order to tap tax on income accruing to foreign e-commerce companies from India, it is proposed that a person making payment to a non resident, who does not have a permanent establishment, exceeding in aggregate Rs. 1 Lakh in a year, as consideration for online advertisement, will withhold tax at 6% of gross amount paid, as Equalization levy. The levy will only apply to B2B transactions.”
What is ‘Equalisation Levy’?
An equalisation levy is intended to serve as a way to tax a multi-national enterprise’s significant economic presence in a country, which are able to avoid taxes completely in the source jurisdiction under the existing international taxation rules which require non-resident enterprises to have a Permanent Establishment in order to attract taxability.
Though, UK and Australia too have initiated steps to tap the concerns of BEPS by introducing “Diverted Profit Tax” and “Multinational Anti Avoidance Law” respectively, India has taken a leap to address the challenges in terms of taxation of MNEs having a digital economic presence in India without any physical presence, by introducing ‘Equalisation Levy’ as a self-contained code to tax Digital Ecommerce transactions under Chapter VIII of Finance Act. The said levy is to provide for a tax deduction of 6 % of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment (‘PE’) in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India.
Why ‘Equalisation Levy’?
The digital economy is growing at a fast pace. Since the businesses in the digital domain don’t occur in any particular physical location, persons carrying business in digital domain could be located anywhere in the world.
These new business models have created new tax challenges. The typical direct tax issues relating to e-commerce are:
Difficulties of characterizing the nature of payment and establishing a nexus or link between a taxable transaction, activity and a taxing jurisdiction, Difficulty of locating the transaction, activity and identifying the taxpayer for income tax purposes. Thus if permanent establishment (PE) principles are to remain effective in the new economy, the fundamental PE components developed for the old economy i.e. place of business, location, and permanency must be reconciled with the new digital reality.
The Organization for Economic Cooperation and Development (OECD) has recommended, in Base Erosion and Profit Shifting (BEPS) project under Action Plan 1, several options to tackle the direct tax challenges which include modifying the existing Permanent Establishment (PE) rule to include digital activities, which would constitute a PE if they are maintained in a significant digital presence in another country’s economy. It further recommended a virtual fixed place of business PE in the concept of PE i.e. creation of a PE when the enterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on business through that website.
The Committee on taxation of E-Commerce formed by the Central Board of Direct Taxes also examined the tax issues arising from the new business models employed in the digital economy. The Committee noted that the ability of multinational enterprises to avoid taxes completely in the source jurisdiction under the existing rules, poses significant challenges and concerns for countries like India. Also, their ability to avoid payment of taxes in India can also adversely impact revenue collections, and lead to a rising tax burden on Indian enterprises and Indian citizens that could be even more detrimental to Indian economy as a whole.
After an in-depth examination, the Committee concluded that a new nexus based on significant economic presence and the withholding tax on digital transactions, would require changes in a number of tax treaties, the option of ‘Equalization Levy’ provides a simpler way that can be adopted under domestic laws without needing amendment of a large number of tax treaties.
Read- Report- Taxation of E-Commerce: Equalization Levy or Google Tax
Salient Features of ‘Equalisation Levy’
To tax the e-commerce transaction/digital business conducted without considering national boundaries. Tax at the rate of 6% of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment (‘PE’) in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India. Specified services means online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government.
No levy if aggregate amount of consideration does not exceed Rs.1 lacs in any previous year.
The CBDT has also notified the Equalisation Levy Rules, 2016, which lays down the procedural framework for the compliances to be undertaken and appeals process to be followed for such levy. These Rules would also be effective from 1 June 2016.
(Disclaimer: This article contains information in summary form and is intended for general guidance only. It is not expected to be a substitute for detailed research or the exercise of professional judgment. Neither the author, his organization nor its affiliates can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this document. On any specific matter, reference should be made to an appropriate advisor)