Equalization levy and widening of tax base through the introduction of concept of ‘Significant Economic Presence’ are the two measures which have been adopted by India for taxation of digital economy. Since both these measures are concerned with taxation of income derived out of digital economy, there exist an overlap. However, the said overlap does not give rise to double taxation of the same income. The reason being there exist an exemption under Section 10(50) of the Income Tax –Act, 1961 which grants exemption to income which has already been taxed under the Equalization levy regime.
Over a period of time, there have been a substantial increase in the digital activity in India. Every individual as well as corporation is in receipt of some or the other digital service provided by non-resident entities. However, the revenue generated by virtue of said services remains untaxed. The chief reason has been lack of sufficient and updated rules of taxation which are suitable to this business model. In order to address the said problem the government introduced ‘Equalization levy’ also called as ‘Google tax’ in 2016. A further step has been taken by the Central Government in order to ensure tax ability of these digital services by introducing the concept of ‘Significant Economic Presence’ in the Budget 2018. The author analyses the interplay of the ‘Equalization levy’ regime and ‘Significant Economic Presence’ regime as both are related to taxation of digital economy. In the Part I of this article, the author gives a brief background of the basis of the aforesaid two regimes. In Part II, the author explains the ‘Significant Economic Presence’ regime as introduced by the Finance Bill, 2018. In Part III, the author explains the ‘Equalization Levy’ regime. In Part IV, the author analyses the interplay between the two regimes and gives a conclusion.
The spread of digital economy poses serious challenges for international taxation. The two very basic challenges are firstly, the way in which the entities involved in digital economy add value and make their profits and secondly, the characterization of these profits under the rules of international taxation. Under the current double taxation regime, a non-resident can be taxed in a state if it has a Permanent Establishment in that state. A Permanent Establishment in a state exists if the entity has a fixed place of business or it has a dependent agent in that state. Therefore, it is evident that an entity needs to have physical presence in order to be subjected to tax liability in that state. Since the rules are necessarily based on the physical presence of an entity, its applicability to digital transactions is doubtful. An entity may undertake a transaction or provide digital services to a resident of other country but may not have any physical presence in that country. In order to address these challenges, the BEPS Action Plan 1 is formulated.
The OECD BEPS Action Plan 1 addresses the tax challenges of digital economy. In its report, it recommends three measures, one of which may be undertaken by the countries in order to address the tax challenges of digital economy. The following are the three measures:
1) Introduction of new nexus rule in form of ‘significant economic presence’.
2) An equalization levy
3) A withholding tax on certain types of digital transactions.
The Finance Bill, 2018 has introduced the concept of ‘Significant economic presence’ in India.
The concept has been introduced by amending the definition of ‘business connection’ under Section 9(1)(i) of the Income Tax Act, 1961. After the amendment, ‘Significant Economic Presence’ of an entity will also constitute ‘Business Connection’ under Art. 9(1)(i). Therefore, after the said amendment all the income deriving to a non-resident from ‘Significant Economic Presence’ in India will be chargeable to tax in India. A non-resident entity will have a ‘Significant economic presence’ if:
1. The aggregate amount deriving out of transactions undertaken by the non-resident in India exceeds a threshold limit as will be prescribed by the Government. The transactions can include provision of downloaded data or software in India in which the non-resident will have no physical presence in India or,
2. It interacts with such number of users as may be prescribed through digital means or,
3. It is systematically and continuously soliciting its business activities through digital means.
The purpose of introduction of said concept is to widen the tax base of India. The intention and object is to charge tax on non-resident entities who interact with all consumers of India without having any physical presence in form of office or any other premises in India.
Equalization levy is a levy imposed on certain specified digital services provided by a non-resident to a resident in India. Equalization levy is a levy which was introduced by Chapter VIII of the Finance Act, 2016. It does not form a part of Income Tax Act, 1961. It has its existence similar to Service Tax under a Finance Act. The levy was introduced to impose tax on e-commerce sector or digital economy. The levy was introduced in order to prevent the loss of revenue caused due to the incompatibility of current rules of international tax with business model followed by the e-commerce sector. The same has already been discussed above. The levy was introduced on the recommendation of Committee on Taxation of E-Commerce. The Committee in its report analyzed all the three options provided under the BEPS Action Plan 1 stated above. On the conclusion of such analysis, it was of the opinion that imposition of Equalization Levy will be most suited to current Indian regime.
‘Equalization Levy’ is a levy imposed on certain ‘specified services’ provided by the non-resident. The ‘specified services’ are said to include online advertising service or any other facility or service provided for online advertisement. The levy cannot be charged on any other service provided other than those mentioned above. The services on which equalization levy can be charged has been kept open to the discretion of the Central Government. The Central Government can bring such services within the ambit of ‘specified services’ which it deems fit. However, no such services have been notified by the Central Government till date.
Equalization Levy is charged on the entire amount of consideration received or receivable by non-resident for the services provided. In other words, the tax is not charged merely on the income of non-resident. The entire consideration which includes income as well as expense element is taken into account while imposition of tax liability. The rate of tax of Equalization Levy is @6%.
Note: In following 3 cases the equalization levy will not be applicable:
a) If non-resident service provider has Permanent establishment in India and income from such specified services are effectively connected to this permanent establishment.
b) If such consideration is not for the purpose of carrying out business or profession
c) Aggregate amount of consideration does not exceed Rs. 1,00,000 in any previous year
It is indeed true that the aim of both the concepts is the taxation of digital economy. However, their scope differs. The scope of the equalization levy is very limited. It is restricted only to certain online advertising and related services. Whereas on the other hand, the ambit of concept of ‘Significant Economic Presence’ is very wide. It covers every type of digital service provided or every kind digital activity undertaken by an entity through which it generates revenue. Considering the broad coverage of the concept of ‘Significant economic service’, it covers services which are already covered under the Equalization levy regime. Therefore, there is an overlapping of the services covered under both regime. The same gives rise to an apprehension of double taxation wherein on one hand equalization levy is being charged on the entire sale consideration of service provided (which includes the income element) and on other hand tax under the Income Tax Act, 1961 is being charged on the income derived from those services.
However, the said apprehension is false. Even though there is overlapping of services covered under both the regimes, there will be no double taxation. The reason for the same being the exemption provided under Section 10(50) of the Income Tax Act, 1961. Section 10(50) states that any income which has been derived out of such services which are subject to ‘Equalization levy’ will be exempt. Therefore, once ‘Equalization levy’ is charged on particular service, the income which would be ordinarily chargeable by virtue of concept of ‘significant economic presence’ will be exempt.
It is thus becomes clear that both the concepts can harmoniously exist with each other.
(The author can be reached at [email protected])
(Republished with Amendments)