Govt must provide clarity on a range of open issues

January 29, 2021 6:50 AM

In conclusion, while India has taken proactive steps to tax digital transactions, it would nevertheless be important for the government to clarify its stance on the various open issues that have lingered for some time now—this will, without doubt, help taxpayers plan their affairs and conduct business more efficiently in India.

Another issue is the taxability of ‘technical services’ or ‘royalties’ which attract income-tax (at 10%)—the current scope may result in such transactions being covered by EL (at 2%) as well. (Representative image)

By Pavan Sisodia

The rapid development of technology, with new-age tech companies leading the charge, has changed the way businesses are being run across the world. In a digital economy, even though consumers and business owners are spread across the globe, there is a free flow of goods and services—whereby, for instance, the service provider may be in the US, provision of services may happen through a server located in the Netherlands and the end-consumer may be in India. In such cases, it is difficult (let alone, quite complicated) to determine the taxing rights and share of tax of each country—with erstwhile laws proving ineffective.

While the international bodies (such as the Organisation for Economic Co-operation and Development, or the OECD) and the law-makers have also been grappling with this issue, many countries—the UK, Italy, Australia. Mexico, and Spain, among others—have already introduced a digital service tax (DST). While India has also introduced provisions to tax overseas digital players based on their number of users in India, the impact of these measures is uncertain considering that these changes will also be subject to applicable tax treaties with different jurisdictions that India has entered into.

The government of India has also recently introduced a new Equalisation Levy (EL), which is in the nature of a DST, besides introducing a levy on online advertisements in 2016 (Ad EL). EL is a flat 2% tax on consideration received by a non-resident ‘e-commerce operator’ (EOp) for providing or facilitating ‘e-commerce supply of goods or services’ to Indian residents or even non-residents in certain cases. EL does not apply when: i) EOp has a permanent establishment in India; ii) EOp’s turnover is < Rs 2 crore; or iii) such services are subject to Ad EL. Unlike Ad EL, EL is also applicable on business-to-consumer (B2C) transactions, payable by the EOp on a ‘quarterly’ basis. Such income is, however, tax-exempt thereafter.

As far as EL is concerned, there are various areas that require further clarification from the government. While it seems that the intent was to tax goods and services sold over a marketplace, considering the term ‘online’ is very wide, it would be important to explicitly clarify that the EL applies only to digitised products and services (and not to traditional businesses/ services).

Another issue is the taxability of ‘technical services’ or ‘royalties’ which attract income-tax (at 10%)—the current scope may result in such transactions being covered by EL (at 2%) as well. Such overlap should be addressed and clarified by the government at the earliest possible. Currently, it may be difficult for EOps to claim a tax credit of EL in their home- countries since it is not strictly in the nature of ‘tax’—this increases the cost of doing business in India, and a suitable mechanism should be devised to provide relief to EOps.

In conclusion, while India has taken proactive steps to tax digital transactions, it would nevertheless be important for the government to clarify its stance on the various open issues that have lingered for some time now—this will, without doubt, help taxpayers plan their affairs and conduct business more efficiently in India.

Partner, International Tax and Transaction Services at EY LLP
Views are personal

With contributions from Arjun SK, senior tax professional with EY

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Government must get it right on oxygen supply
2Relieving Labour’s Pain: Larger MGNREGA allocation, social security scheme needed
3In Ceres: There’s a lot of buzz around space tourism market