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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, thereis 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.
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 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:
- 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 —
- a person resident in India and carrying on business or profession; or
- a non-resident having a permanent establishment in India.
- The equalisation levy under sub-section (1) shall not be charged, where—
- 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.
Equalisation Levy @ 6% shall be charged on the provider of specified service in the following scenario:
- The service provider is a non-resident person who does not have any permanent establishment in India.
- 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)]
- 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)]
- 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.
- 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.
- 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.
- 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.
- Even if the assessee fails to deduct such levy, the same shall be paid to Central Government irrespective of such failure.
- The amount of equalisation levy is to pe paid vide form ITNS-285 that is available on https://www.tin-nsdl.com.
- 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.
- 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]
- 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)]
- 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)]
- 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.
- 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]
- 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]
- 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.
- 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]
- 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]
- 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]
- 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.
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.
Equalisation levy @ 6%
Net Consideration Paid
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.
We can conclude on the following with respect to the equalisation levy.
- The government has made an attempt to tax the non-taxable by introducing the equalisation levy in line with OECD Reports.
- This reduces the inequality created between the pricing of domestic and overseas service providers.
- Even if the levy is charged on overseas service providers, the same is burden of the resident service receiver.
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.
CA Amol Gopal Kabra, Latur
Email – firstname.lastname@example.org