The levy is often referred to as ‘Google tax’ and is applied at the rate of 6% on payments for digital advertisement services received by non-resident companies without a permanent establishment (PE) here if these exceeded Rs 1 lakh a year.
The Central Board of Direct Taxes (CBDT) on Saturday assigned jurisdiction to officers from its international tax division over assessees coming under the purview of ‘equalisation levy’ on e-commerce companies. Experts said the CBDT’s move is a sign that the government is moving ahead with the levy, which came into force on April 1, despite several representations from industry bodies on behalf of foreign companies calling for deferment of the tax due to the fear that the wide-ranging scope of the law may end up taxing even non-digital transactions, leading to possible double taxation.
“As the first due date for payment of equalisation levy is just a month away on July 7, the income tax authorities seem to be working steadily towards the implementation and chances of deferment look bleak,” Sandeep Jhunjhunwala, partner at Nangia Andersen, said.
Tax experts said the finance ministry was expected to defer the levy as it was unclear whether non-resident e-commerce operators need to have income tax registration in India for payment of levy, if tax would be levied on gross consideration or commission income for platform-based business models and corresponding exemption under the Income Tax Act to avoid double taxation.
The equalisation levy, meant to nullify the advantage of foreign e-commerce firms without physical presence in India over local competitors, came into effect in June 2016. The levy is often referred to as ‘Google tax’ and is applied at the rate of 6% on payments for digital advertisement services received by non-resident companies without a permanent establishment (PE) here if these exceeded Rs 1 lakh a year. Companies using these services are required to withhold the tax amount.
Since then, the government has collected Rs 315 crore in FY17, and about Rs 700 crore and Rs 950 crore in the subsequent years via this tax. While there was no announcement in the Budget this year for the tax, it was introduced in the Finance Act to widen the scope.
While the Organisation for Economic Co-operation and Development (OECD) has been engaged in a multilateral approach to find a way to tax digital companies that don’t necessarily have physical presence in a jurisdiction, many countries have adopted some interim tax measure till global solution is reached.
While ‘permanent establishment’ or PE for any company is conventionally based on physical presence to decide the taxability, the definition has proved to be inadequate in the digital era where a non-resident company can generate substantial revenue without being physically present in a particular jurisdiction.
To overcome the inadequate definition of PE for digital services companies, the Finance Bill 2018 defined ‘significant economic presence’, which would determine ‘business connection’ of a company in India and whether it is liable to tax as a corporate entity and be covered under the rules of corporate taxation. However, these new concepts and definition will have to be agreed upon and codified in the relevant bilateral tax treaties before digital companies could become taxable as corporate entities, a government official said.
In the recent consultative paper released by OECD, it proposed to define new nexus independent of physical presence, but largely based on sales. The new nexus could have thresholds, including country-specific sales calibrated to ensure that jurisdictions with smaller economies can also benefit.