CBDT Report on “Equalisation-Levy” – Tackling the digital economy taxation conundrum

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CBDT recently released a 124 page Report of the "Committee on Taxation of E-Commerce" (‘the Committee’) which piloted the induction of 'equalisation levy', proposed by the Finance Bill, 2016. The Committee, in its February 2016 Report, recommended that the levy should be in the range of 6 to 8 % of the gross payment made for specified digital services, the scope of which could be expanded in later years. The Committee had zeroed down on the ‘equalisation levy’ as against the other options proposed in BEPS Action Plan 1, opining that it provided a simpler option that could be adopted under domestic laws without needing amendment to large number of tax treaties. Further, the Committee also suggested that this levy should be outside the Income-tax Act, considering it was not contemplated as tax on ‘income’.

Is the equalisation levy a befitting tax to tackle the digital economy challenges ? By introducing the levy as part of Finance Bill and not the Income tax Act, is the Govt. setting a precedent?  Should the government change its stance & allow Foreign Tax Credit against the levy?  Will the levy's scope expand like Service tax, which also started off as part of Finance Act and is today a cash cow for the Finance Ministry? 

P.V. Srinivasan
(Corporate Advisor)

Sir Issac Newton presented his laws of motion in the year 1686.  Little he would have realized that his third law would have wider application 330 years later in the field of taxation, shaken by the explosion of the digital economy .The third law states that “For every action, there is an equal and opposite reaction”. The BEPS Action Plan got initiated on the premise that MNEs are getting away with double non-taxation. The reaction is to formulate tax policies that would result in double taxation, particularly of the digital economy.  Equalization levy proposed in the Finance Bill,  2016 is a trigger for double taxation. It is proposed as a separate levy outside the Income-tax Act on the premise that it is not a tax on income.  It is a levy which would not qualify for relief under the DTAAs.   It is not creditable tax for service tax purposes also.  The scope of specified services will be expanded soon and will eventually settle with a negative list.   Many economies would emulate the tax policy of India.The internet, an incredible innovation of our times will face the burden of heavy taxation across the globe. Then, Sir Issac Newton’s second...

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Gautam Mehra
(Partner & sector leader, Asset Management, PwC)

The Finance Bill 2016 proposes to introduce an ‘Equalisation Levy’, at 6% on the consideration payable to foreign online advertisement companies. The introduction of such a levy was one of the options considered and deliberated upon – but not recommended – by the OECD in their Report.  The Report went on to state that countries could introduce any of the options in their domestic laws as additional safeguards against BEPS, provided they respect treaty obligations or include them in their bilateral tax treaties.

The introduction of the levy does raise the potential challenge of non-availability of credit in the hands of the recipient in its home country, since this Levy is not under the Income-tax Act, 1961 ('the Act'). This is likely to result in an increase in costs to the payer or the payee. 

One aspect that players in this space should bear in mind, as contained in the Report released by the CBDT-formed eCommerce Committee on this subject, is an expansion of the scope of this Levy to other services as well – there are thirteen other services recommended by the said Report.  Further, the Report also recommends that the rate should be in...

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Dinesh Kanabar
(CEO, Dhruva Advisors LLP)

The recommendations of the Committee are primarily based on their observation that a complete harmonization of international taxation on digital economy would take a long time and accordingly countries which wish to address the challenges, should adopt practical solutions in their domestic laws.  This being the primary basis, the Committee has recommended the introduction of an ‘equalisation levy’ which would be outside the scope of income-tax and would be imposed on the payment or transacted amount rather than the income. 

The above observations and conclusions are of utmost importance since they indicate the thinking and basis for the levy.  The proposals contained in the Finance Bill, 2016 give effect to the conclusions of the Committee in keeping the levy outside the scope of Tax Treaties and making it non-creditable for the non-resident service providers.  The rate of levy has also been recommended keeping in mind the fact that it would not be creditable.  The Committee also notes that nothing prevents other countries to grant credit for the ‘equalisation levy’. 

In fact, according to the Committee, the rate of levy and the levy in itself should be seen as a relief and not a burden since the...

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Rajendra Nayak
(Partner, International Tax Services, Ernst & Young LLP)

Digital economy taxation remains one of the most uncertain tax aspects of multinational business today. This is despite two years of work by the OECD on its Base Erosion and Profit Shifting Project (BEPS) Action 1: Addressing the Tax Challenges of the Digital Economy. In fact, much of the OECD’s work on the digital economy lies ahead of it – delegated to its Task Force on the Digital Economy (TFDE) for completion in 2020. In the meantime, countries are implementing diverse national digital economy tax policies that reinterpret. In parallel, disruptive technologies and digital business models such as the sharing economy continue to evolve at a breath taking pace that is exacerbating policymakers’ challenges. With more and more companies and industries deploying new digital business models that disrupt traditional trade flows and strain existing tax regimes around the world, the OECD viewed its digital economy tax work as critical to the global economy – so much so that it was designated Action 1 of the BEPS 15-point Action Plan, which included the proclamation that “the digital economy is the economy itself”. Digital business was also implicated in the other 14 BEPS Actions: Action 1 guidance actually draws on...

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T.P. Ostwal
(Senior Partner, T P Ostwal & Associates)

Persons receiving payments do not need credit, as it is always paid by payers only (without which transaction will not be successful) and this results in additional cost to payer. In  such situation, in my opinion, no credit is required .But the real issue is that this levy is half-cooked law, without public comments and no serious attempt was made, which means whatever tax Govt. was collecting was futile.

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