Govt. panel to levy 6%-8% equalization levy on e-commerce transactions above Rs.1 lakh
A government appointed committee proposed an Equalization Levy of 6% - 8% on e-commerce transactions that cross Rs.1 lakh. This move is to bring the burgeoning e-commerce sector under the tax net. In its report to the Finance Ministry, the committee stressed, “that only payment exceeding Rs.1 lakh made by a resident Indian or a permanent establishment of a non-resident person to a non-resident enterprise be covered under this levy, which may be charged at a rate between 6% - 8% of the gross payment made for specified services.” This equalization levy could be imposed on a wide spectrum of digital services and facilities that included – cloud computing, website designing hosting and maintenance, online marketing and advertisements, digital platforms built specifically for sale of goods and services, digital space and online use or downloading of applications or software. The committee examined the various tax issues that arose out of the new business models based on digital economy. It made the government aware that there were tax issues related to the existing tax laws and treaties, the modes of payments made for the services and facilities that were provided primarily through digitized means and also the challenges that government agencies faced with regard to valuation of data and the quantifying of consumer usage that digital companies revealed as profits. The committee also noted the lack of proper jurisdiction of laws and regulations in a still developing country like India, where digitization is yet to take precedence. Taking advantage of the situation, multinational enterprises tend to avoid paying taxes. This not only leads to an adverse impact on the tax revenues, it also imposes an unfair situation to the Indian companies who end up paying more than their overseas counterparts, which is detrimental to their growth. The committee also placed cognisance on the Report of Action 1 of the BEPS (Base Erosion & Profit Sharing) project that throws significant light in identifying the tax challenges, possible options to address them, and the likely constraints that could be faced in a digital economy. This report has been validated and accepted by the G-20 countries, OECD and India too. However with the evolution of newer models based on digital economy, it is logical for countries like India to face challenges in understanding how to characterize the payments for digital goods and services, as India often opts for taxation on royalty and fees charged under technical services. The BEPS Report highlights three options that could bring about some semblance of order in the digital revenue chaos-
- A new drafting of rules and laws based on economic presence
- Restraining tax on digital transactions and
- Equalization Levy
Though the report clearly desists from using any of these options now in India given the amount of work needed to attribute profits, but gives the country’s govt full right if it wishes to adopt any of these options either as domestic law or as part of its bilateral tax treaties. Thus the decision to recommend keeping a threshold of payments exceeding Rs.one lakh made by a resident Indian or a permanent establishment of a non-resident person to a non-resident enterprise be covered under this levy, which may be charged at a rate between 6% - 8% of the gross payment could in a way keep almost all B2C transactions and many B2B transactions out of the Equalization Levy purview, thereby curbing its impact. The income arising from Equalization Levy should also not be subject to income tax, but should only be limited to those who wish to claim payment as a deductible expense or have determined the same as taxable profits in India. Simple filing of returns online could in a major way enable those who pay through payment gateways or via authorized foreign exchange dealers to be morally obliged to file their returns. There is a need for continuous monitoring of the digital economy and the making up of dynamic international taxation rules that could be implemented in India.
March 22, 2016 | 05:30pm IST