Equalisation Levy was introduced in Union Budget 2016-17 of India. The Finance Act 2016 envisages a separate Chapter VIII titled 'Equalisation Levy' in accordance with the Organisation for Economic Co-operation and Development (OECD)'s view as part of the global Base Erosion and Profit Shifting (BEPS) recommendation to tax e-commerce transactions.
One of the salient features of the Equalisation Levy is that the tax is aimed at the e-commerce business transactions which are conducted without regard to national territorial boundaries. Further, the equalization levy would be 6% of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India. And there would be no levy, if aggregate amount of consideration does not exceed Rs. 1 lakh in any previous year.
The tax is largely applicable on the income of technology companies incorporated outside India and not having permanent establishment in India. The impact of the levy, however, would not be solely on the business of internet e-commerce giants. It is leading to re-shaping of business models to escape the levy. This article focuses on the newly introduced tax, its impact due to raising the cost of marketing and its future expectations.
TAX DEDUCTION TO BE MADE BEFORE MAKING THE PAYMENT FOR SPECIFIED SERVICES:
As per the Finance Act 2016, payments exceeding Rs. 1 lakh in a previous year1, received or receivable by a person, being 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
will be subject to tax at the rate of 6 per cent as equalisation levy2 from gross amount paid for the specified services. A 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.3
The equalisation levy shall not be charged in the following scenarios:
- the non-resident providing the specified service has a permanent establishment in India and the specified service is effectively connected with such permanent establishment;
- 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
- 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.4
The Central Board of Direct Taxes (CBDT), Ministry of Finance has notified the rules for equalisation levy and has also informed that the tax will come into effect from June 1, 2016.5 The Equalisation Levy Rules, 2016 lays the procedural framework for the compliances to be undertaken and the procedure for appeals to be followed for such levy.
Business owners, whether permanently resident or not, will have to withhold 6% of the payments they make to foreign technology companies for advertising. Online business startups which use Facebook, Google etc for advertisement and promotion purposes will also have to withhold such tax from the payment amount to the foreign technology company and deposit it with the government along with relevant tax statements. This will make the business owners to rebuild their business plans and strategy.
THE FAR-REACHING IMPACTS OF THE LEVY ORIGINALLY INTENDED FOR THE PURPOSE OF EQUALISATION:
The services at which this tax, also gaining popularity and dubbed as Google Tax, is levied include online advertising or providing digital advertising space with the primary aim of levying tax on the income generated by internet giants from Indian advertisers. The Equalization levy is imposed on the payment of the advertisers and has introduced India e-commerce industry to a new kind of tax. It will affect the business of e-commerce giants which do not have permanent establishment in India. Internet giants like Facebook and online start-ups which receive payments from Indian advertisers will also be largely affected. The tax has come into effect from 1st June, 2016 along with Equalisation Levy Rules, 2016 notified6 by Central Board of Direct taxes.
Google tax or Equalisation levy, as the name suggests, is aimed at leveling the play field between e-commerce players of domestic and foreign origin. In fact, Indian companies, especially the e-commerce companies are expected to benefit from it. This tax is expected to change the schematics of online advertisement. This tax is separate from the service tax. It is not a tax on service but a tax on the business for online advertisements. "Looking at the global scenario regarding imposition of similar kind of levy, it should be noted that India is not the only country to have imposed a tax to address the concerns arising from the ability of digital multi-national enterprises to avoid paying taxes in the jurisdiction from where they are earning their income. UK has imposed a 'Diverted Profit Tax' from 1.4.2015 to address these concerns. Australia has imposed a 'Multinational Anti Avoidance Law' from 1.1.2016. Italy is reported to be considering a new 'Digital Tax' consisting of 25% withholding tax on payments. Some countries, like Brazil already impose withholding tax on such payments. These instances, along with the fact that the G-20 and OECD countries now agree on the rights of every country to impose any of the actions identified in the BEPS Report on Action 1, is a clear indication that countries across the World are thinking about it. Compared to the taxes being imposed in other countries, the Equalization Levy proposed by the Committee is completely in accordance with the international consensus and suggestions."7
In practice, the equalisation levy burden is being passed on to the businesses seeking advertisement services by non-resident companies providing advertisement services. If the foreign company refuses to take the burden of this levy and the business still want to advertise on the foreign company's platform then it will have to shell out the extra amount for tax to be deposited to the government for availing the advertisement services from the non-resident.
The levy of tax can hugely impact the business decisions of the business owners. A new start-up or a business which does not have a significant share in the market needs advertising to reach to the consumers. The decisions regarding how much is to be invested for advertising and decisions for new business initiatives may be influenced as the cost of advertising has now increased for the businesses. Hence, while government may benefit from extra inflow in the form of tax revenue, Indian businesses, especially the start-ups and the small and medium-sized enterprises would be more significantly impacted with practically an increase in their marketing cost.
The resultant adverse impact on the profitability of enterprises paying taxes in India can lead to significant detrimental impact on the fiscal health of Indian economy and consequently, on its growth.8 Challenges also exist in respect of valuation of user data and contributions, that are relied upon by enterprises for earning profits from a jurisdiction and which need to be taken into account for determining taxable nexus and attribution of profits to the jurisdiction.9
The levy of such tax increases the cost of doing business by adding to the marketing cost. Indian start-ups are major users of digital advertising platforms as they usually refrain from utilizing costlier forms of advertising. "The Internet and Mobile Association of India (IAMAI) is of the view that this levy will severely raise the cost of doing business of Indian tech start-ups and the SMEs that are primary users of the digital ad platforms. The tech start-ups are already paying 14.5% service tax to use these ad platforms which amounts to an estimated INR 906 crores of taxes to the government. With the implementation of GST, the tax rate is likely to move to 18% bringing more taxes to the government from this segment. Considering that the incidence of 6% levy will be passed on to the advertisers by the ad platforms, the total burden to SMEs and Tech Start-ups on account of Equalization Levy would be an additional burden of INR 429 crores, a massive hike of nearly 50%. This will raise the cost of operations substantially. Prima Facie it looks impractical and unreasonable, that to collect additional revenues of INR 400 crores, the government is ready to hurt the start-ups. This will turn out to be a levy on Indian start-ups. India will stand out like a sore thumb, if the government doesn't withdraw this proposal or figure out a clear mechanism whereby the asessee will not pass it on to the users of the platforms."10
A clear mechanism is indeed required to direct the ultimate impact of levy on those entities at which it was originally aimed at.
Equalisation levy was aimed at e-commerce transactions taking place irrespective of national territorial boundaries. It intended to provide level-playing field between e-commerce players of domestic and foreign origin wherein Indian e-commerce companies are expected to benefit from it but it rather seems that a larger impact would be on start-ups and mid-sized businesses bearing the tax burden in practical sense. The equalisation levy or Google Tax is making businesses reshape their business strategies. The business which require marketing its products by digital advertising is shifting its marketing business to online digital space providers which are either Indian or non-resident service providers having permanent establishments in India. Many e-commerce giants will now be forced to establish their permanent establishments in India if they want to escape the levy to continue to retain their customers seeking advertising services from them. A clear and well-directed mechanism is desired to be in place to save the online start-ups and small to medium sized businesses from being hit by extra cost of advertising. The law needs to be clearly laid out that the assessee non-residents receiving payments are not allowed to pass the tax-burden to the end-user of services. The boundaries and restrictions of physical presence based taxation of income of non-resident services providers in digital economy. There are many challenges which equilisation levy is bound to face apart from the passing of tax burden to the customers of advertisement services like the up-coming implementation of the Goods and Services Tax, valuation of user data and contributions of non-resident service providers, attribution of profits to a jurisdiction by the non-resident service providers etc.
Equalisation levy is new step in the tax regime. The law requires further clarifications towards disallowing the passing of tax burden to Indian service receivers. Such a clarification, if provided, can be expected to direct the levy of tax where it was originally aimed at.
1 Section 166 of Finance Act, 2016.
2 Section 165(1) of Finance Act, 2016.
3 Section 164 (i) of the Finance Act, 2016.
4 Section 165 (2) of the Finance Act, 2016.
5 Notification No. PB-6(2)/2015-Fin/IT-Misc/453-73, dated 6th June, 2016. Available at: http://prasarbharati.gov.in/Information/Documents/Circular%20-%20dt%2006.06.2016%20-%20Reg.%20Introduction%20of%20Equalisation%20Levy.pdf
6 Equalisation Levy Rules, 2016 as notified by CBDT in Notification No. 38/2016, Ministry of Finance, Government of India on 27th May, 2016. Available at: http://www.incometaxindia.gov.in/communications/notification/notification382016.pdf.
7 Proposal for Equalization levy on Specified transactions, February, 2016, Prepared by the Committee on Taxation of E-Commerce formed by the Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India.
8 Para 169, Id. 9 Para 168, Id.
10 IAMAI president Dr Subho Ray's comments as per press release dated April 26, 2016, Available at: http://www.iamai.in/media/details/4695.
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