The government may expand the scope of the so-called equalisation levy proposed in the Union Budget, seeking to bring more transactions in the digital economy under the tax net.
An indication of this came from the suggestions of a committee formed by the income-tax department to study the taxation of e-commerce.
The ambit of equalisation levy on e-commerce transactions can be expanded in the coming years to include downloading of songs, movies and books, online consumption of news, software downloads and online sale of goods and services, the committee has suggested.
The suggestions of the panel were made public on Monday.
To be sure, the equalisation levy is proposed initially for only business-to-business transactions and not on direct sales to customers.
Based on the panel’s recommendation, the government had in the budget announced a new equalisation levy of 6% to be deducted for payments made to non-resident entities for specified services like online advertisements.
Also called the “Google tax”, it has been structured to ensure that every entity making a payment to a non-resident for online advertisements will have to deduct this tax before making the payment.
According to a January 2015 report by The Boston Consulting Group, the number of Internet users in India is expected to surge from 190 million as of June 2014 to about 550 million in 2018. According to the report, in 2013, Internet-related contribution to gross domestic product (GDP) was 3.2% at $60 billion, which is expected to increase to 4.6% at $160 billion in 2016.
The equalisation levy was introduced to ensure that global online businesses such as Alphabet Inc., Facebook Inc. and Twitter Inc., which earn considerable revenue from India, are taxed in the country.
“India has taken a lead in taxing digital economy,” said Shefali Goradia, partner, BMR and Associates Llp. “The report published by the committee on taxation of e-commerce is fairly comprehensive and has examined various dimensions of imposing a new tax on digital economy.”
“Since foreign companies having a permanent establishment (taxable presence) in India are exempt from this levy, the committee hopes that this will discourage companies from artificially avoiding permanent establishment in source countries,” Goradia added.
The idea of an equalization levy is part of the proposals made by Organisation for Economic Cooperation and Development’s (OECD’s) base erosion and profit shifting (BEPS) guidelines. The BEPS refers to shifting of profits from the high tax-rate countries to lower tax-rate jurisdictions.
The committee also recommended that specified taxable services could include “designing, creating, hosting or maintenance of website, digital space for website, advertising, emails, online computing, blogs, online content, online data or any other online facility and any provision for uploading, storing or distribution of digital content”.
Besides this, “use or right to use or download online music, online movies, online games, online books or online software, without a right to make and distribute any copies thereof; online news, online search, online maps or global positioning system (GPS) applications; online software applications accessed or downloaded through the Internet or telecommunication networks and online software computing facility of any kind and for any purpose” could also be brought under the proposed levy over the coming years.
“Personally, I don’t think there is any reason why there should be an equalisation levy because there is already a tax which is being deducted at source when there is a B2B transaction,” said Bishakha Bhattacharya, senior director at the software services industry lobby group, Nasscom. “We are representing to the current government…that you want to put an equalisation levy, that is okay, you have the choice to do that, but please ensure that that particular entity is not taxed twice on the same income.”
The other services that can be included are online collection or processing of data related to online users in India; any facility or service for the online sale of goods or services or collecting online payments, and development or maintenance of participative online networks.
“The government has provided a rationale for taxing digital economy transactions, and it seems that the government will seek to tax a wide range of digital economy transactions under the equalization levy (currently online advertising supply chain and other services through notification in future),” Rakesh Jariwala, tax partner (media and entertainment) at EY, said in a note. “It is therefore imperative the government not only lays down clear guidelines around the transaction covered under the levy but, equally, the manner of determination as to whether equalization levy or income-tax will apply on a transaction. Else the transaction could lead to double taxation: equalisation levy as well as income-tax.”
To reduce the compliance and administrative costs, the committee further recommends that the equalization levy of 6% to 8% “should be restricted to business-to business (B2B) transactions, and not apply it to the business-to-consumer (B2C) transactions, which are more frequent, but of smaller amounts, at this stage, or till that point of time when a mechanism becomes available, by which equalisation levy can be seamlessly collected in B2C transactions, without burdening the consumer”.
Rakesh Nangia, the managing partner at tax advisory Nangia and Co, said that the government took the right decision of initially restricting this levy to only select services.
“If the recommendations of the committee in this regard were accepted as is and all the services provided through internet or telecommunication media were imposed an equalization levy, e-commerce companies in India would have been hit badly, considering the additional cost of 6%,” Nangia said.