Sumit Jha & Anushree Bhattacharya
While the coming Budget may reduce the headline corporate tax rate to 25% from 30% for all domestic companies — the lower rate is already applicable to firms where FY16 annual turnover did not exceed Rs 50 crore — the resultant revenue loss could be partly offset through some steps to boost direct tax receipts. With the finance ministry likely to take on board the proposals by an expert committee, a whole array of cross-border digital transactions — from website hosting and cloud services to facilitation of the sale of goods and services — between firms abroad and customers in India could see a new impost. The so-called equalisation levy (EQL) — which is designed to nullify the advantage of foreign e-commerce firms sans a physical presence in India over local competitors — had already found its way into the statute with the Budget 2016-17 imposing a 6% tax on online advertising fees paid to overseas companies by Indian customers if the gross value of such payments exceeds Rs 1 lakh a year.
While the EQL has impacted Google and Facebook, among others, sources privy to the government’s thinking on this expect a clutch of other e-commerce and other online activities to be brought under its purview. They also see chances of the levy, now restricted to B2B deals, being extended to B2C transactions above a certain threshold. Practically, the specified services, if directly rendered to India by the overseas parent/associates of the likes of Amazon, Microsoft, Oracle and Netflix, could be brought under the levy In its report submitted to the government in March 2016, the committee set up by the finance ministry suggested an EQL between 6% and 8% on amounts paid to non-residents by an Indian resident or permanent establishment (PE) of a non-resident for specified digital services. It said: “…but such obligation should be limited to only those payers who wish to claim that payment as a deductible expense for determining taxable profits in India. Committee also notes that deduction by payment gateways and by authorised foreign exchange dealers can significantly reduce the obligations on payers, and strongly recommends that work should be initiated for exploring this possibility.” According to the committee, once EQL is levied, the income arising from the relevant transaction won’t be subjected to income tax to avoid double taxation. The foreign firm won’t get credit in its home country for the EQL paid here. Analysts said the proposed levies would raise the burden on the digital industry and run contrary to the government’s campaign for digitisation. “Home-grown firms like us which make its own content, may not feel the pinch as much as a few international firms who are in the business of acquiring content. An increase in taxation would also mean a slowdown in the digital business which is still at a nascent stage,” said Nachiket Pantvaidya, group COO, Balaji Telefilms. The firm run a video streaming platform called Alt Balaji, which competes with likes of Netflix and Amazon Prime.
In fact, after the government proposed EQL on digital advertisements in the 2016 Budget, several companies including Facebook moved their PEs to India in order to come out of the tax’s ambit. “Given that Base Erosion and Profit Sharing Action Plan-1, which include taxation of cross-border digital services, is likely to come out in the next few months the government shouldn’t jump the gun by expanding the scope of equalisation levy at this stage. The levy itself is arbitrary and in contravention to several bilateral treaties that India has with other sovereigns,” said Pranav Sayta, partner, EY. The committee on taxation of digital services had argued: “The Committee proposes that the Equalization Levy may be imposed on specified digital services and facilities including online marketing and advertisements, cloud computing, website designing hosting and maintenance, digital space, digital platforms for sale of goods and services and online use or download of software and applications.”