5 Mar 2016

Equilization Levy: Indian version of 'Google Tax'?

Multinational Corporations have taken up the tax battle to the countries. For long concerns have been raised over dwindling tax base owing to artificial shifting of profits by the MNCs. Now these concerns have now been officially documented at the aegis of the OECD under its 'Base Erosion and Profit Shifting' (BEPS) Project. The BEPS Action plan of OECD describes this narrative in the following terms;
Over time, the current rules have also revealed weaknesses that create opportunities for BEPS. BEPS relates chiefly to instances where the interaction of different tax rules leads to double non-taxation or less than single taxation. It also relates to arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place. No or low taxation is not per se a cause of concern, but it becomes so when it is associated with practices that artificially segregate taxable income from the activities that generate it. In other words, what creates tax policy concerns is that, due to gaps in the interaction of different tax systems, and in some cases because of the application of bilateral tax treaties, income from cross-border activities may go untaxed anywhere, or be only unduly lowly taxed.
Of particular disquietude is the affect on the tax base on account of digital transactions as, according to the OECD BEPS Action Plan, "digital economy is characterised by an unparalleled reliance on intangible assets, the massive use of data (notably personal data), the widespread adoption of multi-sided business models capturing value from externalities generated by free products, and the difficulty of determining the jurisdiction in which value creation occurs."

To thwart these tax-avoidance attempts and particularly those arising out of artificial shifting of residence in digital transactions, the international tax community has recently seen new levies particularly characterised as the 'Google Tax'. A number of countries have initiated attempts on bring in specific rules taxing corporations engaged in digital transactions amidst their jurisdictions such that they pay a fair share of tax on the income derives from the operations in such jurisdictions. United Kingdom (HMRC) has been the frontrunner being in the headlines for long and has explained its position publicly in a recently announted Policy briefing to this effect. Wikipedia entry on Google Tax informs that Australia and Spain have similarly announced promulgation of such taxation rules.

The Union Budget for 2016-17 presented by the Finance Minister on 29-Feb-2016 proposes to impose a similar tax branded as 'Equilisation Fee'. Chapter - 8 of the Finance Bill, 2016 (when enacted) would stand out as a sui generis levy on consideration earned by foreign companies for providing "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" to Indian businesses. The levy would be enforced indirectly i.e. by way of obliging the Indian businesses paying the foreign companies to deduct from the consideration the tax amount which currently stands at six percent of the total consideration payable for the service. The Memorandum accompanying the Finance Bill, 2016 explains the rationale for the new levy and its salient features in the following terms;
With the expansion of information and communication technology, the supply and procurement of digital goods and services have undergone exponential expansion everywhere, including India. The digital economy is growing at ten per cent per year, significantly faster than the global economy as a whole.
Currently in the digital domain, business may be conducted without regard to national boundaries and may dissolve the link between an income-producing activity and a specific location. From a certain perspective, business in digital domain doesn't seem to occur in any physical location but instead takes place in the nebulous world of "cyberspace." Persons carrying business in digital domain could be located anywhere in the world. Entrepreneurs across the world have been quick to evolve their business to take advantage of these changes. It has also made it possible for the businesses to conduct themselves in ways that did not exist earlier, and given rise to new business models that rely more on digital and telecommunication network, do not require physical presence, and derives substantial value from data collected and transmitted from such networks.
These new business models have created new tax challenges. The typical direct tax issues relating to e-commerce are the difficulties of characterizing the nature of payment and establishing a nexus or link between a taxable transaction, activity and a taxing jurisdiction, the difficulty of locating the transaction, activity and identifying the taxpayer for income tax purposes. The digital business fundamentally challenges physical presence-based permanent establishment rules. If permanent establishment (PE) principles are to remain effective in the new economy, the fundamental PE components developed for the old economy i.e. place of business, location, and permanency must be reconciled with the new digital reality.
The Organization for Economic Cooperation and Development (OECD) has recommended, in Base Erosion and Profit Shifting (BEPS) project under Action Plan 1, several options to tackle the direct tax challenges which include modifying the existing Permanent Establishment (PE) rule to include that where an enterprise engaged in fully de-materialized digital activities would constitute a PE if it maintained a significant digital presence in another country's economy. It further recommended a virtual fixed place of business PE in the concept of PE i,e creation of a PE when the enterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on business through that website. It also recommended to impose of a final withholding tax on certain payments for digital goods or services provided by a foreign e-commerce provider or imposition of a equalisation levy on consideration for certain digital transactions received by a non-resident from a resident or from a non-resident having permanent establishment in other contracting state.
Considering the potential of new digital economy and the rapidly evolving nature of business operations it is found essential to address the challenges in terms of taxation of such digital transactions as mentioned above. In order to address these challenges, it is proposed to insert a new Chapter titled "Equalisation Levy" in the Finance Bill, to provide for an equalisation levy of 6 % of the amount of consideration for specified services received or receivable by a non-resident not having permanent establishment ('PE') in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India.
Further, in order to reduce burden of small players in the digital domain, it is also provided that no such levy shall be made if the aggregate amount of consideration for specified services received or receivable by a non-resident from a person resident in India or from a non-resident having a permanent establishment in India does not exceed one lakh rupees in any previous year.
To provide certainty and to avoid interpretational issues, it is also proposed to define certain terms and expressions used therein. Further it also proposes to provide for the procedure to be adopted for collection and recovery of equalisation levy.
In order to provide for the administrative mechanism of the equalisation levy, it also proposes to provide for statutory authorities and also prescribes the duties and powers of the authorities to administer the equalisation levy. In order to ensure effective compliance, it also proposes to provide for interest; penalty and prosecution in case of defaults with sufficient safeguards. 
This new tax has already been dubbed as the Indian version of Google Tax by the print media. See [1] [2] There are certain important aspects of the new tax;
  • The tax is on the gross amount earned by the foreign companies. Therefore it is not one akin to a standard income tax which is on profits i.e. permits deduction on account of expenses from the revenue earned.
  • The tax would be administered by way of provisions termed as 'tax collection at source'. Thus the manner of collection of this tax is akin to those cases which are considered peculiar to be administered owing to the tax-base being scattered / unorganised. Currently there are very few cases to which tax collection at source provisions apply.
  • The proposed provisions do not indiciate a fixed time-line to commence the tax application and leave it to a subsequent notification which will announce the date of the levy. Ordinarily income tax applies from first date of assessment year i.e. 1st April of a year. However since this is a tax collection on consideration earned by foreign company (which will not be assessed but the payer will be required to comply with the law), there is a possibility that this new tax can be enforced even during the year.
While the finer nuances of the levy will be known only at a later date when it becomes operational, it is indeed of particular significance to note that Indian tax laws are matching up the Indian trends.

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