Equalisation Levy and Compliance
By CA Prakash Hegde and CA Raghavendra N.
In the last month’s bulletin, we discussed the meaning of BEPS, the final Action Plans and India’s initiatives in relation to these Action Plans. Now, let us discuss Action Plan 1 of BEPS Action Plans relating to Digital Economy and India’s action in this regard.
What is Digital Economy?
‘Digital Economy’ refers to an economy which is based on digital computing technologies. It is also called Internet Economy or Web Economy. The BEPS report states that digital economy is increasingly becoming the economy in itself and would be difficult to ring fence it from the rest of the economy for tax purposes.
The digital economy has given rise to various new business models like cloud computing, mobile applications etc. which have created new tax challenges. Action Plan 1 aims to address the tax challenges around the Digital Economy. With technology, it is possible to carry on an economic activity with minimal or no physical presence in a jurisdiction, leading to a tax base erosion in the country where the customers / users of the digital products and services are based, impacting both developed, as well as developing countries such as India which constitute a large user / customer base. The digital economy in India is growing at more than 10% in a year, which is much faster than the global economy as a whole.
The Organization for Economic Cooperation and Development (‘OECD’) considered / recommended several options to tackle the direct tax challenges arising from the digital economy. The options include, modifying the existing Permanent Establishment (‘PE’) rules to include that where an enterprise engaged in fully de-materialized digital activities would constitute a PE if it maintains a significant digital presence in another country. One other option discussed is the imposition of a final withholding tax on certain payments for digital goods or services provided by a foreign e-commerce provider or imposition of an equalisation levy on consideration for certain digital transactions received by a non-resident from a resident or from a non-resident having PE in other contracting state.
Following the Action Plan, the Central Board of Direct Taxes (‘CBDT’) constituted a committee, comprised of senior officials from the Finance Ministry and the Income Tax Department, industry representatives, Institute of Chartered Accountants of India (ICAI) representatives and independent professionals to study and report on taxation in e-commerce. The Committee examined the tax issues for new business models as well as took cognizance of detailed discussion by the OECD in the digital economy Action Plan. In spite of the wait-and-watch approach suggested in the action plan, the Indian Government, in Finance Act 2016, introduced the equalization levy to tax digital economy transactions.
Charge of Equalisation Levy
‘Equalisation Levy’ is charged at 6% of the amount of consideration for any ‘specified service’, if the consideration is received / receivable by a non-resident from
- A person resident in India and carrying on business or profession; or
- A non-resident having a permanent establishment in India
This levy is applicable for the consideration received or receivable for ‘specified service’ provided on or after 01 June 2016.
‘Specified service’ for the purpose of Equalisation Levy means
- online advertisement
- any provision for digital advertising space or facilities / service for the purpose of online advertisement
- any other services as may be notified by the Central Government
The Central Government has not yet notified any other services.
Levy not to be charged in certain cases
Equalisation Levy shall not be charged where
- the non-resident providing the specified service has a PE in India and the specified service is effectively connected with such PE; or
- the aggregate amount of consideration for specified service received or receivable in a year by the non-resident from person referred in (i) or (ii) above does not exceed Rs 1,00,000; or
- the payment for the specified service is not for the purpose of carrying out business or profession
Deduction & Payment of Levy and Liability for Interest & Penalty
It should be noted that Equalisation Levy should be deducted at source from the amount paid or payable to non-resident if the aggregate amount of consideration in a year exceeds Rs 1,00,000. The amount so deducted should be paid to the credit of the Central Government by the 7th day of the following month.
Any assessee who fails to deduct the equalisation levy will be liable to pay the same from his pocket. Interest at 1% of such levy for every month or part of a month shall be payable for delay in payment. An assessee who fails to deduct the levy shall be liable to pay a penalty equal to the amount he failed to deduct. An assessee who failed to pay the levy after deduction shall be liable for a penalty of Rs 1,000 per day, subject to a limit of the amount of levy.
Annual Statement (Return)
After the end of each financial year, a statement in Form 1 has to be electronically filed on or before 30 June. Therefore, the Equalisation Levy Annual Return in Form 1 for financial year 2016-17 is due by 30 June 2017. An assessee who fails to furnish the above statement within the time prescribed shall be liable to a penalty of Rs 100 per day.
Equalisation Levy and Income-tax
Equalisation levy has been introduced under a separate code under Finance Act 2016 and not under the Income-tax Act, 1961. Therefore, the same is not considered as part of income-tax. However, it is worth to note that the income-tax authorities are authorised to assess equalisation levy and ensure compliance.
It may also be noted that any income arising from any specified service chargeable to equalisation levy is exempt from income-tax [under section 10(50) of the Income-tax Act]. Further, amount paid / payable for any specified service on which equalisation levy is not deducted or not paid shall be disallowed while computing income chargeable under the head ‘Profits and gains of business or profession’ [under section 40(a)(ib) of the Income-tax Act].
Relief under the Tax Treaty for Equalisation Levy paid in India
Under the Double Taxation Avoidance Agreements (‘DTAA’) entered in to between India and most of the countries, the term ‘tax’ is defined to include ‘Indian income tax’ and ‘surtax’ etc. But equalisation levy cannot be considered as ‘income tax’. However, it is interesting to note that most of the DTAAs state that the DTAA ‘shall apply also to any identical or substantially similar taxes’. Therefore, claiming equalisation levy as a credit (in the country of residence) could be an option which can be explored depending on the interpretation of this phrase and the domestic tax laws of the country of residence of the person who suffered equalisation levy in India.
The new provisions of equalisation levy introduced with effect from 01 June 2016 are impacting the way business is done by companies like Google, Facebook, Yahoo, etc. in India, as this levy would result in an additional tax out-flow to these companies, which the Government thinks could have shifted profit from India to a country with low tax rates and its effort to effectively curb such a practice of profit shifting in such digital transactions. [Equalisation Levy, is therefore, also called as ‘Google Tax’!]. Now, with the introduction of equalisation levy, the Indian Government will have its share in the income from the specified digital transactions earned by the non-resident. However, the person availing the specified services (i.e. the payer of consideration) is obligated to deduct and pay taxes to the Government and is also required to comply with an annual return etc. which would only lead to an additional compliance burden for him.