CA Prateek Gattani

Origin of Equalization levy:

Action plan[1] on Base Erosion and Profit Shifting (‘BEPS’) issued by Organization for Economic Co-Operation and Development’s (‘OECD’) inter alia has proposed to levy a tax on digital transaction to equalize the tax burden on remote and domestic supplier of goods as well as services.

Following the action plan on BEPS issued by OECD, Indian government while moving towards Digital India has proposed to impose tax on DIGITAL ECONOMY. Hon’ble Finance Minister in its budget speech proposed to insert a new chapter titled Equalization Levy in the Finance Bill 2016 to tax specified services as provided by specified non-resident persons.  It is interesting to note that, India is a first country to impose equalization levy to tax on digital economy.

Further, it is pertinent to note that this amendment will also overrule the Hon’ble Kolkata Tribunal ruling in the matter of ITO vs Right Florist Private Limited[2] wherein Tribunal stated that payment for online advertisement is not taxable, if service provider doesn’t have permanent establishment in India.

Chargeability:

Finance Bill, 2016 proposed that provisions for imposition of equalization levy shall be governed by a separate and self-contained code and would not be part of the Income-tax Act, 1961. Chapter VIII of the Finance Bill 2016 deals with this levy. Clause 161(d) of the Finance Bill 2016 defines equalization levy means

‘tax leviable on consideration received or receivable for any specified services under the provisions of this chapter’

 Thus equalization levy will be levied on specified services. Specified services is defined in clause 161(i) of the Finance Bill 2016, which means:

a. online advertisement;

b. any provision for digital advertising space or any other facility or service for the purpose of online advertisement;

c. any other service as may be notified.

It is pertinent to note that, Hon’ble Finance Minister in his budget speech stated that the equalization levy is aimed at taxing business-to-business (B2B) e-commerce transactions. Therefore, the scope of the levy may be expanded to cover a wider range of digital goods and services as time progresses.

Applicability:

This levy shall be applicable from the date when provisions of Chapter VIII of the Finance Bill notify by government. The rate of equalization levy shall be six per cent (6%) of the amount of consideration received or receivable for Specified Service, by non-resident person does not having a permanent establishment (PE) in India from

a. a person resident in Indian carrying on business or profession; or

b. non-resident having a PE in India

(herein after referred as ‘specified persons’)

It is pertinent to note here that, this levy will not be applicable when Specified Person makes a payment to a non-resident having a PE in India, for the Specified Services. As in the case recipient (i.e. non-resident) would be taxable for regular PE basis taxation.

Further, equalization levy shall not be leviable when aggregate payment made during the financial year does not exceeds INR 1,00,000.

Compliance provisions under Chapter VIII of the Finance Bill, 2016:

Compliance provisions as proposed under chapter VIII of the Finance Bill 2016 are identical to withholding compliance provisions as mentioned under chapter of the Income-tax Act, 1961 (‘the IT Act’).

Clause 163 of the Finance Bill 2016 provided that, Specified Persons shall require to deduct the equalization levy from the amount paid or payable to a non-resident for Specified Services.

The amount so deducted by service recipient (i.e. Specified Persons) shall require to be deposited with Government exchequer within seven days from end of the month in which the amount has deducted. However, any delayed payment carries a simple interest at 1% of the outstanding levy amount for every month or part thereof.

Service recipient shall also require to file an annual statement in prescribed time and in prescribed form, with government after end of the each financial year. Annual statement shall contain the details of services received, consideration amount etc.

Penal provisions in case of non-compliance

Chapter VIII of the Finance Bill 2016 carries penal provisions to initiate penalty and prosecution in case of non-compliance provisions of this chapter.

Penal provisions as proposed under chapter VIII

  • Specified Persons fails to deduct equalization levy while making payment to non-resident, for specified services: Specified Person shall be liable for penalty equal to the amount of outstanding levy including interest;
  • Specified Persons fails to deposit equalization levy with government exchequer with in precibed time: Penalty shall be equal to INR 1,000 per day it failure continues, but does not exceed the amount of the outstanding equalization levy along with interest;
  • Specified Persons fails to file annual statement: Penalty of INR 100 per day till the failure continues shall be applicable in this case. It is important to note that there is no upper cap on the maximum amount of penalty, thus penalty amount may exceeds the amount of outstanding levy.

Provisions for prosecutions proposed under chapter VIII

Specified person shall be liable for imprisonment for term up to 3 years and fine, if false annual statement has been filed by such Specified Persons. It is imperative to note that, amount of fine has not been provided under chapter VIII of the Finance Bill, hence it may be on discretion of the assessing officer. However, for initiation of penalty of prior approval for Chief Commissioner of Income-tax shall be required.

Provisions regarding filing of appeals

Chapter VIII of the Finance Bill also provide that, Specified person may file an appeal before the Commissioner of Income-tax (Appeals) against penalty order pass by the assessing officer. Further, order of Commissioner of Income-tax (Appeals) may challenge before the Income-tax Appellate Tribunal (ITAT). Provisions dealing with appeals are similar provision as prescribed under section 249 to 255 of the IT Act.

Key Issues to be considered:

♠ Is it a way to override tax treaties?

  • Clause 161(d) of the Finance bill, 2016 which defines equalization levy means tax leviable on consideration received or receivable for any specified services under the provisions of this chapter. It is imperative to note here that tax is not defined in the Chapter VIII of the Finance Bill 2016, however this chapter provides that any of term which is not defined in this chapter but defined under IT Act and rules made thereunder, shall have the same meaning as assigned to them in the IT Act.
  • The term ‘Tax’ is defined u/s 2(43) of the IT Act as

tax” in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date 41[and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under section 115WA] ;]

  • Therefore conjoint reading of section 2(43) of the IT Act read with clause 161(d) of the Finance Bill 2016 it appears that equalization levy is nothing but income-tax only. It is a settled principal of interpreting the tax treaties that, in the absence of PE of non-resident business income (payment specified services in the instant case) for such non-resident cannot be taxed in the source country (i.e. India in the present case). Thus, imposition of equalization levy by Indian government is an attempt to unilaterally override tax treaties in surreptitious manner through amendments in domestic laws.
  • It is imperative to note that tax treaties is governed by Vienna Convention. This convention amongst others provides that treaty benefits can-not be overridden by amendment in domestic laws. Although India is not signatory of this convention but still principals of this conventions may be applied for governing of tax treaties as signed by India.
  • Further, recently Hon’ble Delhi High Court in recent ruling[3] which has been one of landmark precedent in jurisprudence of international taxation, wherein Hon’ble Delhi High Court stated that treaty benefit can-not be override by amendment in domestic laws. Hence, any amendment in domestic law which is against the mandate of the tax treaty shall be tested by the courts in India. There are other rulings of the other High Courts which supports this proposition[4].
  • Without get into larger debate, it is also pertinent to note that Article 51 of the Constitution of India which provides for Directive Principles of State Policy provides that government shall endeavor to foster respect for international law and treaty obligations in the dealing of organied peoples with one another.

♠ Equalization levy and its credits: a tricky task

  • It is imperative to mention that, equalization levy as proposed under the Finance Bill 2016, shall be governed by separate chapter of Finance Bill. It will not become part of the IT Act.
  • Needless to mention that, any tax paid by non-resident in the source country (India in the hand case) shall be get credited in its resident country based on the provisions of the domestic tax laws and provisions of the relevant tax treaties signed by the source country and resident country.
  • Equalization levy shall neither be deducted under the domestic law (i.e. under the IT Act) nor under the applicable tax treaty, if any, it shall be deducted under the provisions of the Finance Bill, 2016 / Finance Act, 2016 (as if gets president’s ascent). Thus it will be difficult for the non-resident to get credit of equalization levy as (as deducted by the specified persons) in its resident country.

Introduction of equalization levy is significant step taken by Indian Government to tax the digital economy transactions. Although, intent and applicability of levy is not free from any controversy. However, once the other services and rules relating to proposed equalization levy shall notify, we will get better insights of scope, applicability and intent of the proposed levy. Further, it should be appreciated that presently payment to a non-resident for online advertisement is subject to levy of service tax, hence there is no doubt that introduction of equalization levy would increase cost of doing business for Indian Companies.

[1] Action Plan 1 : Addressing the Tax Challenges of the Digital Economy, dated 05th October 2015 (http://www.oecd.org/ctp/addressing-the-tax-challenges-of-the-digital-economy-action-1-2015-final-report-9789264241046-en.htm)

[2]  http://taxguru.in/income-tax/advertisement-charges-paid-google-yahoo-taxable-website-constitute-pe-india.html

[3] Director of Income Tax v. New Skies Satellite BV and Anr ITA Nos. 473 of 2012, 474 of 2012, 500 of 2012 and 244 of 2014

[4] Sanofi Pasteur Holding SA v. Department of Revenue (2013) 354 ITR 316 (AP); DIT v. Nokia Networks 2013 (358) ITR 259 (Del)

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