By EN Dwaraknath
Economies worldwide are coming to terms with how to deal with the impact of the Covid-19 pandemic. Businesses across sectors have been on a roller-coaster ride for the last two years. While some sectors have shown greater resilience than others for palpable reasons, the pandemic has acted as a catalyst for others.
The technology sector (for the most part) found itself uniquely poised to grow even during this phase, with certain newer-age industries within this space rapidly growing over the last couple of years. Even in more traditional industries, ‘going digital’ has been the buzzword as companies have realised that embracing technology is no longer an option, but a necessity for survival. This has been equally true for India as the country has been witnessing rapid progress in the digital space, especially during the pandemic years. A gentle policy thrust would help nudge the sector further ahead.
Clarity on certain aspects for the digital sector will support it in accomplishing its growth potential. Specifically, this space has been impacted by the introduction of the Equalisation Levy (EL) and Significant Economic Presence (SEP) provisions in the statute.
The expanded scope of EL has been concerning for the sector. The term ‘e-commerce operator’ has still not been defined rationally in the law to align it with e-commerce marketplace, resulting in a lot of interpretation issues and avoidable ambiguities. The sector would welcome guidance on this aspect in the upcoming Budget. It is also a fact that traditional brick-and-mortar businesses cannot function without basic technology support in terms of telecommunications, digital conferences, e-mail, etc. Unfortunately, a strict reading of the provisions coupled with the amendments in the Finance Bill 2021 give the impression that even those traditional businesses could come under the purview of EL for merely using technology as an aid. This has added to the apprehension and the sector awaits clarity from the government on this.
A somewhat larger apprehension of the digital sector lies in the apparent absence of a provision enabling the adjustment of EL paid with potential income-tax liability in future. Many non- resident digital businesses are paying the 2% EL from FY20–21. Yet, there is an exposure that the stream of income may subsequently be categorised as royalty/fees for technical services (FTS) by the tax authorities, resulting in a 10% tax outlay. The extant EL regulation does not prescribe a mechanism for the refund of EL or a set-off against the tax liability paid as royalty/FTS. It is the need of the day that such enabling provisions are made available to taxpayers. Separately, on the administrative side, prescribing an appeal/grievance redressal mechanism for EL is another expectation of the industry.
The Finance Act, 2018 introduced provisions relating to SEP. This unilateral measure is intended to curb tax leakage relating to digital transactions by expanding the scope of taxation for non-residents. SEP provisions would be applicable in cases where non-resident taxpayers do not have tax treaty protection and thus, its application is expected to be limited. Nevertheless, taxpayers expect clarity on certain provisions to ensure that they have certainty around this legislation. For example, the provisions are widely worded at present to potentially cover even non-digital transactions within their ambit. The government could consider rationalising this provision. Separately, profit attribution rules are yet to be notified and clear guidance on this aspect will help taxpayers obtain a degree of certainty as regards their Indian tax positions. Further, a section of the tax fraternity believes that the de minimis threshold of 3 lakh subscribers or revenue of `2 crore for the application of SEP provisions have been set too low and enhancing such a threshold is a logical step forward.
In 2021, the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) took significant steps forward and agreed on a definitive milestone to implement the two-pillar solution for taxing the digital economy. While Pillar 1 aims at attributing revenues to market jurisdictions for taxation, Pillar 2 revolves around imposing a global minimum corporate tax rate of 15%. India is a signatory to this framework and needs to abide by various commitments, including withdrawing existing digital taxes and not introducing new unilateral measures to tax digital companies. Thus, by and large, the fate of EL and SEP provisions depend on the implementation of this framework. The industry would certainly expect a clear roadmap to align these interim measures with the two-pillar framework.
In the post-pandemic world, digital maturity of a business would largely decide its sustenance and growth. The digital sector is expected to gain further importance and will be the backbone of the economy. Therefore, some clarity on these aspects would be welcome.
The author is Partner, Price Waterhouse & Co, LLP. Views expressed are personal.