INTRODUCTION
The last two decades have witnessed momentous change in
technology. The entire globe has been moving towards digitization in a
lightening speed. The world in fact has become a global digital village.
We have witnessed transformation of business, the products,
the services, the delivery of products and services, all because of
digitization. Digitization knows no boundaries and not limitations. There are
no custom barriers and check posts for digital transactions.
The definition of delivery of products and services has
been changed. Lot of goods and services, earlier in either tangible or intangible
form, now in digital form are being delivered cross border just at a click.
This digitization has resulted in complications in taxation
of digital transactions by the nations.
TAXATION –
PHYSICAL VERSUS DIGITAL
In the physical transactions or services, the levy of
taxation is simple. Few parameters decide the levy of taxes, whether direct
taxes or indirect taxes, that include the residency of the service provider or
seller, the location of goods or services, the movement of goods, the destination
of goods or services, etc. Accordingly, the basis of taxation is decided.
On the other hand, in the era of digitization, the services
are provided and accessed on a digital platform which are beyond the scope of
geographical boundaries of the countries. Services and intangible goods can be
provided from any part of the world and accessed at a different place. This
results into difficulties in deciding the parameters of taxation for such
digital goods and services.
The services are provided from a server based in a
different country, preferably a tax haven, where the rates of taxes on earnings
are either zero or considerably lower than the country of service provider or
service receiver.
Further, the intangible goods are services are delivered
and accessed on a digital platform, that doesn’t know the geographical
boundaries. Hence, there is no question of crossing the custom frontiers of the
country.
Similarly, as the services are not provided by a person
having permanent establishment in the country, the other indirect taxes such as
Goods and Service Tax are also not leviable.
DISPARITY
The goods and services that are delivered through a digital
platform create disparity amongst the services providers in the country and
those from other countries. The resident service providers have to pay taxes
and comply to the business regulations of the residence country. The resident
service providers cannot compete the overseas service providers in lieu of
taxation impact.
Further, the taxes (both direct as well as indirect) on the
goods and services so provided on digital platform are being avoided and the
government of the country is unable to tax the same. This is the problem with
almost every country where the government is unable to collect taxes on such
digital transactions.
OECD REPORT
ON BEPS
The Organisation for Economic Co-operation and Developmemnt
(OECD), consisting of 36 member countries, had constituted a group for study on
taxing of such digital transactions and other relevant issues in 2013.
Accordingly, the action plan to address the tax challenges of the digital
economy was issued under the “Action Plan on Base Erosion and Profit Shifting.”
(Source: OECD (2013), Action Plan on Base
Erosion and Profit Shifting, OECD Publishing.
In 2015, the group issued its report on “Addressing the tax
challenges of the digital economy” which discussed three alternative solutions.
One of the solutions in the report was ‘Equalisation Levy’. (Source: OECD (2015), Addressing the Tax
Challenges of the Digital Economy, Action 1 - 2015 Final Report, OECD/G20 Base
Erosion and Profit Shifting Project, OECD Publishing, Paris.
EQUALISATION
LEVY
Equalisation Levy is a type of withholding tax which is
charged on the services provided on a digital platform across countries. The
word “equalization” implies equalising the tax impact of resident service
providers in line with the overseas service providers for services provided on
digital platform.
In many countries, this equalisation levy is also called as
‘Google Tax’ as Google had the most impact on introduction of such levy. This
‘Google Tax’ or equalisation levy was also adopted by India.
The Honorable Finance Minister Shri. Arun Jaitley had in
his budget speech of Union Finance Budged, 2016 had said the following.
“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 nonresident, 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
Equalisation levy. The levy will only apply to B2B transactions.”
Accordingly, relevant provisions were included in Finance
Bill, 2016. The provisions of equalisation levy are discussed in the following
paragraphs.
APPLICABILITY
OF THE LAW
The provisions of Finance Act, 2016 with respect to
equalisation levy extend to whole of India, except the state of Jammu and
Kashmir.
The said provisions are applicable for payment of
consideration made on or after 1st June, 2016.
CHARGE OF EQUALISATION
LEVY
Section 165 of the Finance Act, 2016 states as below:
(1)
On and from the date of commencement
of this Chapter, there shall be charged an equalisation levy at the rate of six
per cent of the amount of consideration for any specified service received or
receivable by a person, being a non-resident from —
(i)
a person resident in India and
carrying on business or profession; or
(ii)
a non-resident having a permanent
establishment in India.
(2)
The equalisation levy under
sub-section (1) shall not be charged, where—
(a)
the non-resident providing the
specified service has a permanent establishment in India and the specified
service is effectively connected with such permanent establishment;
(b)
the aggregate amount of
consideration for specified service received or receivable in a previous year
by the non-resident from a person resident in India and carrying on business or
profession, or from a non-resident having a permanent establishment in India,
does not exceed one lakh rupees; or
(c)
where the payment for the specified
service by the person resident in India, or the permanent establishment in
India is not for the purposes of carrying out business or profession.
Equalisation Levy @ 6% shall be charged on the provider of
specified service in the following scenario:
1.
The service provider
is a non-resident person who does not have any permanent establishment in
India.
2.
The service receiver
is either a person resident in India and carrying on business or profession, or
a non-resident who has a permanent establishment in India.
Permanent establishment includes a fixed place of business through which
the business of the enterprise is wholly or partly carried on. [Section 164(g)]
3.
The service so
provided is a ‘specified service.’ The Government of India has specified the
service in section 164(i) of the Finance Act, 2016.
Specified service 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 in this behalf. [Section 164(i)]
Online means a facility or service or right or benefit or access that is
obtained through the internet or any other form of digital or telecommunication
network. [Section 164(f)]
4.
The aggregate amount
of consideration paid to non-resident service provider as mentioned earlier for
such specified services exceeds rupees one lakh during the previous year.
5.
The payment of
consideration of such specified service is for the purpose of business or
profession only.
COLLECTION,
RECOVERY AND COMPLIANCES
Following are the provisions with respect to collection,
recovery and compliances of the equalisation levy.
1.
The service receiver (the
assessee) who pays the consideration for specified services shall deduct the
equalisation levy @ 6% at the time of payment of credit in the books of
account.
2.
Such amount so
deducted shall be paid to the credit of central government by the 7th
of succeeding calendar month. Point is to be noted here that for the month of
March the due date shall be 7th April and not 30th April
as in case of TDS.
3.
Even if the assessee
fails to deduct such levy, the same shall be paid to Central Government
irrespective of such failure.
4.
The amount of
equalisation levy is to pe paid vide form ITNS-285 that is available on https://www.tin-nsdl.com.
5.
The assessee has to
furnish a return of equalisation levy decuted and paid to the credit of Central
Government on an annual basis. The same is to be furnished in Form-1
electronically specified by the Equalisation Levy Rules, 2016. The due date for
furnishing the form is 30th June after the end of the financial
year.
INTEREST,
PENALTIES AND PROSECUTIONS
Following are provisions with respect to interests,
penalties and prosecution with respect to equalisation levy.
1.
The assessee who fails
to pay the amount of equalisation levy to the credit of Central Government
within due date has to pay simple interest @ 1% for every month or part of
month for the delayed period. [Section 170]
2.
The assessee who fails
to deduct whole or any part of equalisation levy shall be liable to pay a
penalty of the amount equal to the default. [Section 171(a)]
3.
The assessee who fails
to pay the equalisation levy so deducted shall be liable to pay a penalty of
Rs. 1,000 per day for which the default continues. However the amount of
penalty shall not exceed the amount of equalisation levy deducted. [Section
171(b)]
4.
The assessee who fails
to furnish the statement in Form-1 shall be liable to pay penalty of Rs. 100
per day during which the default continues. [Section 172]
It is to be noted that section 172
does not specify the maximum amount of penalty.
5.
The penalty under
sections 171 and 172 shall not be imposed unless the assessee has been given a
reasonable opportunity of being heard and the assesse proves to the
satisfaction of the assessing officer that there was a reasonable cause for the
failure. [Section 173]
6.
If the assessee
furnishes a statement that is false, or he knows or believes it to be false, or
he does not believe it to be true, shall be liable for punishment with
imprisonment for a term which may extend to 3 years of with fine or both.
[Section 176]
7.
However, the
prosecution against any person shall not be instituted except with the prior
sanction of the Chief Commissioner of Income Tax.
ASSESSMENT
AND APPEALS
Following are the provisions with respect to processing of
statements and appeals with respect to equalisation levy.
1.
The statement filed by
the assessee shall be processed and an intimation thereof shall be sent to the
assessee. Such intimation shall be sent before the end of one year from the end
of financial year in which the statement is filed. [Section 168]
2.
If any amount is
payable by the assessee by way of equalisation levy, interest, or penalty, an
intimation or the notice of demand shall be issued to the assessee. [Rule 7]
3.
An assessee aggrieved
by an order imposing penalty, may refer an appeal to the Commissioner of Income
Tax (Appeals) within a period of 30 days from the date of receipt of such
order. [Section 174]
Such appeal shall be filed in Form-3
accompanied with an appeal fees of Rs. 1,000. [Rule 8]
4.
An assessee aggrieved
by an order of Commissioner of Income Tax (Appeals), may appeal to the
Appellate Tribunal against such order within a period of 60 days from the date
of receipt of such order. [Section 175]
Such appeal shall be filed in Form-4
accompanied with an appeal fees of Rs. 1,000. [Rule 9]
IMPACT
UNDER INCOME TAX ACT, 1961
The Finance Act, 2016 has also inserted sub-clause (ib)
after sub-clause (ia) in section 40(a) whereby the consideration paid or
payable by way of specified services (online advertisement) without deduction
or payment of equalisation levy shall be disallowed.
However, the same shall be allowed in a subsequent year
when it is paid to the credit of Central Government.
PRACTICAL
DIFFICULTIES
The Finance Act, 2016 has imposed equalisation levy of 6%
on non-resident persons not having permanent establishment in India for
providing online advertisement services to persons resident in India or
non-residents having permanent establishment in India.
However, the liability and burden of compliance is imposed
on the person who pays such consideration. This is because, the Government of
India does not have any jurisdiction on the overseas entities. The levy so
charged is in nature of withholding tax.
The practical difficulty faced by the service receivers is
that the service providers are not concerned with the taxes and levies
applicable for the service receiver. Many of these service providers have
clarified that the amount agreed for the services to be provided is deemed to
be after all the applicable levies and taxes of the country of service
receiver.
In this scenario, the service receiver has to pay the levy
from his own pockets. Also, when the amount paid to the overseas service
provider is deemed to be after all applicable taxes and levies, the calculation
of 6% also changes. This is explained in the below example.
Example 1 – Where the service provider agrees for deduction
of equalisation levy.
|
Consideraton Paid
|
5,00,000
|
|
Equalisation levy @ 6%
|
30,000
|
|
Net Consideration
Paid
|
4,70,000
|
Example 2 – Where the service provider doesn’t agree for
deduction of equalisation levy.
In this case the actual consideration paid is assumed to be
the net consideration and levy has to be calculated on inverse basis in the
following manner.
Equalisation
Levy = Consideraton Paid x (6 / 94)
In above case, if we assume Rs. 5,00,000 as the net
consideration paid, the equalisation levy comes to 31,915.
Also, we need to understand the stand taken by the service
providers. The service providers do not agree for the deduction of equalisation
levy for the reason that they do not get any deduction of such taxes paid in
the country of their residence in absence of any DTAA between such countries
with respect to equalisation levy.
CONCLUSION
We can conclude on the following with respect to the
equalisation levy.
1.
The government has
made an attempt to tax the non-taxable by introducing the equalisation levy in line
with OECD Reports.
2.
This reduces the
inequality created between the pricing of domestic and overseas service
providers.
3.
Even if the levy is
charged on overseas service providers, the same is burden of the resident
service receiver.
DISCLAIMER
The content of this hand-book is based on the
interpretation of the author and is subject to difference of opinion with
others. Care has been taken with respect to correctness the legal provisions
mentioned herein. However, any errors or omissions are unintentional. The
contents of the handbook should not be taken as opinion of the author for
entering into any transaction.
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