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This article was written by Sanjana Banerjee, a student of NUALS.
The 2016 Union Budget was instrumental in introducing the concept of equalisation levy in India. Also dubbed as ‘Google Tax’, this levy was intended to bring the thriving e-commerce business within the tax net. The levy was specified to be 6% of the amount of consideration for specified services received or receivable by a non-resident not having a permanent establishment (PE) in India. As per the Finance Act, 2016 payments exceeding Rs. 1 lakh in the previous year received or receivable by a person being a non-resident from:
- A person resident in India and carrying on business or profession
- A non-resident having a permanent establishment in India
However, before venturing into the Finance Act of 2016 it is important to understand the BEPS Plan or otherwise known as the Base Shifting and Profit Erosion Plan discussed in detail by the Organization of Economic Cooperation and Development and the G20 countries.The OECD released its final report on the tax challenges of the digital economy under its Action Plan on Base Erosion and Profit Shifting (BEPS) which provide three different options for overcoming these challenges and one of the options suggested was equalisation levy.
Globally, nations have tried to tax the digital economy through a combination of measures such as introduction of specific provisions under the domestic law, anti-avoidance rules and levy of consumption tax. The U.K was instrumental in introducing the diverted Profit Tax (DPT) at the behest of the G20 countries and sought to tax 25% on profits generated in Britain. Argentina introduced the Turnover Tax at the rate of 3% on off-shore foreign companies providing e-services. Australian and Japan have also started taxing digital transactions under their domestic VAT/GST which were earlier not taxable in the absence of a foreign company having local business.
Rationale behind the introduction of this new levy
E-commerce is undoubtedly the most innovative way of conducting business in recent times and the entire set up runs on intangible media using the digital telecom network and without any physical presence. Action taken by these tax authorities to tax these digital transactions have always drawn flak as they do not have a PE and nor do these payments qualify as royalties or fees for technical services under the interpretation given under tax treaties.
The Indian Tax Tribunal in the case of Yahoo India Pvt. Ltd. v Right Florists had previously held in the favour of Yahoo and Google stating that advertising income received by such companies is not taxable in India simply because of the fact that the ‘physical presence’ of these companies is absent and also the fact that such payments are also not liable to be taxed as royalties and fees for technical service (FTS). However, after discussions under the BEPS Action Plan initiated by OECD, India was the first such country to introduce the ‘Equalization Levy’ under its domestic tax legislation based on the recommendations of the apex tax body.
The 2016 Finance Bill which proposed the equalization levy of 6% specified payments made for online digital payments had also left the window open to include other digital payments as may be notified from time to time. Further, the levy is applicable only to online payments made in excess of Rs. 1 lakh in a financial year to a particular foreign enterprise which does not have any PE in India.The payer is required to withhold the equalization levy from the consideration payable to the non-resident.Further, the non-resident is not liable to income tax if the payments received by it is subjected to equalization levy.
Four categories of companies fall under the net of equalization levy:
- Foreign internet companies such as social media companies, internet search engines, media websites, e-commerce companies, apps and game developers that do not have any presence in India.
- Digital advertisement intermediaries that render digital ad-related services such as ad management, website management, uploading of ads, ad trading agencies etc.
- Foreign broadcasting network companies that derive revenue from Indian companies for advertisement in television and radio.
- Small Indian companies, start-ups and e-commerce entities may also be impacted as the foreign digital media enterprises hold the market as they may dictate to that the Indian companies have to absorb tax cost which eventually leads up to grossing up of payments.
The payments which are specifically excluded include –
- Payments made by individuals for posting blogs, job seekers etc.
- Payments made by Govt. departments to sensitize the public
- Payments made by NGOs
Currently the scope of the levy is proposed only on digital advertisements but based on the panel report the levy could be extended to other services. Potential services that could be targeted in the future include:
- Web developers and server management companies
- Service providers engaged in the field of uploading, storing or distribution of digital content
- Online data processing and collection companies
- Payment gateways
- App market place such as Android, iTunes selling music, online games, online books and online software etc.
- Online software applications
Potential Tax Impact
The impact of the above levy would be on the recipient foreign company as 6% of the consideration of service would be withheld by the Indian payer. As there is no tax credit mechanism for this levy the foreign companies may not get reductions/tax credit in their home companies. Further, for Indian businesses who may have to gross up the equalization levy it would be a direct cost as the credit is not creditable unlike service tax. Further, this also creates an additional burden on Indian taxpayers as they are required to withhold tax and file returns and any non-compliance may lead to disallowance of expense, interest on late payments and penalties.
 KPMG, “Tax Konnect” (June, 2016), available at https://home.kpmg.com/content/dam/kpmg/pdf/2016/06/KPMG-India-Tax-Konnect-June-2016-2.pdf.
 Shivam Hargunani, “Equalisation Levy: Re-shaping Business Models in Digital Economy (Mondaq 18th August, 2016), available at http://www.mondaq.com/india/x/520180/Financial+Services/EQUALISATION+LEVY+RESHAPING+BUSINESS+MODELS+IN.
 Deloitte, “BEPS: Impact on Technology, Media and Telecommunication” available at https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/tax-2016/in-tax-deloitte-impact-tmt.pdf.
 Prabhu Govindan, “Equalisation Levy- Indian version of Google Tax” (Orange blog by Taxsutra ) available at http://orange.taxsutra.com/articles/274c6bbeb88d3bd5fb14d7d7a7d21e/expert_article.
 Vikas Vasal, “Equalisation Levy: Tread with Caution”(The Hindu Businessline), available at http://www.thehindubusinessline.com/opinion/equalisation-levy-should-not-disturb-startups-of-india/article9679019.ece.
 Deloitte, “Equalization Levy, 2016: Is it really equitable?” (June 2016), available at https://www2.deloitte.com/content/dam/Deloitte/in/Documents/technology-media-telecommunications/in-tmt-equalization-levy-2016-noexp.pdf.
 I.T.A No. 1336/Kol / 2011.
 Deloitte (fn 7) at 3.