It could lead to double taxation because of the non-availability of tax credit for such a levy
The ways of doing business in a digital economy have evolved rapidly. Traditional tax norms, effective in addressing issues in a world before high-paced technological and e-commerce, are increasingly becoming outdated. Taxation of e-businesses has been a globally identified challenge with tax authorities acknowledging that corporates in this disruptive environment need more evolved rules.
The OECD’s BEPS Project, identified Addressing the Tax Challenges of the Digital Economy as the first action plan. This took note of the work done by the Task Force on the Digital Economy (TFDE), a subsidiary body of the OECD Committee of Fiscal Affairs. TFDE presented its interim report in 2014 and the final report in 2015.
In the backdrop of the discussions around BEPS, it was expected that India would seek to adopt some of the recommendations. Budget 2016 has proposed the introduction of an “Equalisation Levy” of 6% on certain e-commerce transactions. The proposals are contained in Chapter VIII of the Finance Bill 2016 and do not find place in the I-T Act. The proposals cover transactions where foreign e-commerce companies provide online advertisement or digital advertisement services with levy being applicable on foreign e-commerce companies who do not have a taxable presence in India in the form of a Permanent Establishment (PE). The Budget speech noted that, in order to reduce burden of small players in this market, a threshold of R0.1 million has been set.
A reading of the provisions in the fine print highlights that this levy is not an Income-tax per-se. It being a separate levy, questions around whether treaty provisions, where applicable, can be said to override the Finance Bill provisions (to be enacted) and thus can be argued as not leviable, becomes crucial. Another issue is whether credit of the levy can be said to be available to the recipient foreign company under the applicable treaty provisions and/or a reading of the respective domestic tax law of the recipient entity.
It would be interesting to note that TFDE, among various options, had evaluated the possibility of an equalisation levy, but had concluded that this measure is not recommended at this stage. TFDE envisaged that the other measures of the OECD report should be sufficient to mitigate the broader tax challenges of the digital economy. The OECD report notes that an equalisation levy could lead to double taxation because of non-availability of tax credit for such a levy. On this count, the Budget proposals have been fair inasmuch as a total exemption has been
provided to the recipient foreign e-commerce company under the I-T Act, assuming no PE situation. Thus, this is likely to result in an additional cost of 6% to the recipient foreign company, whereas there could have been a potential non-taxability in a no-PE situation. This levy will therefore be over and above the tax that the recipient e-commerce entity has to bear in the recipient jurisdiction.
All in all, a unilateral ‘levy’ on the business income of a company, which has no PE as per the existing tax rules, is not likely to be viewed favourably by the industry.
With inputs from Rohan Dhopatkar, associate director, PwC
The author is partner and leader (technology & e-commerce), PwC