Google Tax: India’s Tax perspective
With ever evolving technological advancements, the businesses have found unique ways to operate their businesses just by relying on digital technology. As a result of the rapid technical development, the new business models have come with a set of new tax challenges in terms of connection, characterization and valuation of data and user contribution.
The combination of inadequacy of physical presence-based connection rules in the tax treaties and the possibility of taxing such payments as royalty or fee for technical services creates a fertile ground for tax disputes. To bring in clarity in this regard, the government has brought various tax policies in order to bring digital corporations under the ambit of taxation, which included:
As part of the measures to address the tax challenges posed by the increased digitalization of the economy, an “equalisation levy” was initially introduced by the Finance Act, 2016 on certain non-resident businesses colloquially called “Google Tax”. The levy was initially applied at a rate of 6% on certain “specified services”—such as online advertisement and any provision for digital advertising space or any other facility or service for the purpose of online advertisement. Therefore, tech giants like Google, Flipkart, Facebook, Twitter were taxed through equalisation levy.
Thereafter, the scope was extended by Finance Bill, 2020, as passed by the Lok Sabha, to cover within its scope the consideration received or receivable for e-commerce supply or services made or facilitated by an e-commerce operator at the rate of 2% from the consideration received or receivable by an e-commerce operator from e-commerce supply of goods or services made or provided or facilitated by it to the specified persons.
An analytical synopsis of levy under both regimes are given below;
|Particulars||Ad EL as introduced by FA 2016||E-com EL as introduced by FA 2020|
|Trigger for EL in India.||Non-resident service provider engaged in providing specified services as below.||Non-resident e-commerce operator who owns, operates or manages digital or electronic facility or platform in connection with India operations.|
|Non-resident who sells advertisement to another non-resident which targets an Indian resident customer or a customer who accesses the advertisement through internet protocol (IP) address located in India.|
|Non-resident who sells data, collected from an India resident person or from a person who uses IP address located in India|
|Specified services/ transactions on which EL is applicable||Online advertisement.||Online sale of goods owned by the nonresident e-commerce operator.|
|Any provision for digital advertising space.||Online provision of services provided by the non-resident e-commerce operator.|
|Any provision of facility or service for online advertisement.||Online sale of goods or provision of services or both, facilitated by the non-resident ecommerce operator.|
|Any other service which may be notified later by the central government||Any combination of activities listed above.|
|Specified persons/ buyers to trigger EL||Any person resident in India and carrying on business or profession.||Any person resident in India.|
|Non-resident having a PE in India||Any person who buys goods or services or both using IP address located in India.|
|Any non-resident in respect of offshore purchas|
|Person responsible for compliance or person obligated to pay EL in India||Payer.||Non-resident e-commerce operator.|
|Exemptions from EL obligation||Ad EL is not applicable if:||E-com EL is not applicable if:|
|Non-resident has a PE in India and specified services (as above) are effectively connected to PE in India; or||Non-resident e-commerce operator has a PE in India and e-commerce transaction is effectively connected to PE in India; or|
|Aggregate value of consideration for specified transactions do not exceed INR 0.1 million (approx. US$1,300) in a FY; or||Aggregate value of consideration for specified transactions do not exceed INR20 million* (approx. US$265,000); or|
|Where payment is not for the purpose of carrying out business or profession.||Where Ad EL is levied on services.|
|Exemption from levy of income tax in India if the income is subject to EL in India||Yes, service income which is otherwise taxable under the ITL will be exempt in the hands of non-resident in India.||Yes, service or sales income which is otherwise taxable under the ITL will be exempt in the hands of non-resident in India.|
It is to be noted that limit of INR 20 million is not buyer specific and shall include total turnover from all the specified buyers. Thus, where the total turnover of e-commerce operator from specified buyers exceeds INR 2 crore in a financial year, it has to pay equalisation levy of 2% on its total turnover from said buyers.
Compliance and Penal Provisions
|Particulars||Ad EL as introduced by FA 2016||E-com EL as introduced by FA 2020|
|Due date for Deposit of EL||Payment of the deducted EL shall be done on or before 7th of next month. That is, if the deductor has to pay the Equalisation of February, then he has to pay it on or before 7th of March.||The equalisation levy is to be paid by the nonresident e-commerce operator quarterly within the following due dates;
|Mode of Deposit of EL||Online. (accessible at https://onlineservices.tin. egovnsdl.com/etaxnew/ PopServlet?rKey=504 20435)||Online. (accessible at https://onlineservices.tin. egovnsdl.com/etaxnew/ PopServlet?rKey=504204 35)|
|Filing of Statement* of EL||Statement of equalisation levy is to be furnished in Form 1 on or before 30th June of the financial year immediately following the financial year in which EL is chargeable. Verification can be done online via use of Digital Signature or Electronic Verification Code|
|Correction to filed Statement||Any assessee who has not furnished statement (Original/revised) by the due date, he can furnish such statement at any time before the expiry of 2 years from the end of the financial year in which such online specified services were availed.||Any e-commerce operator who has not furnished statement (Original/revised) by the due date, he can furnish such statement at any time before the expiry of 2 years from the end of the financial year in which such ecommerce supply or services was made or facilitated.|
|Interest||Delayed payment carries simple interest at the rate of 1 percent for every month or part of a month.||Delayed payment carries simple interest at the rate of 1 percent for every month or part of a month.|
|Penalty||A payer is liable to deduct the eq ualisation levy under Section 165 in respect of online advertisement services, thus, penalty may be charged on him for two defaults; – one for not deducting the equalisation levy, and – second, for deducting but not depositing the levy with in the due dates||EL payable under Section 165A, the penalty is levied only on the e-commerce operator on its failure to deposit the levy with the Indian Govt. he shall be liable for payment of penalty of an amount equals to the amount of equalisation levy that he failed to pay.|
*If in case, the foreign entity does not have any PAN, it needs to apply with the Income Tax Department and get the compliance done.
The equalisation levy on e-commerce transactions will have a significant impact on non-resident providers of digital supply or services, especially given the fact that the definition of the terms ‘ecommerce operator’ and ‘e-commerce supply or services’ is fairly wide in scope and accordingly Equalisation levy @6% for Advertisement services and @2% for e-commerce transactions needs to be paid.
MNC’s earning income from India will need to evaluate the impact of the equalisation levy on their businesses. It is important to note that as the provisions of equalisation levy are not part of the income-tax law, the tax treaty benefits may not be available in relation to such levy.
Further, lack of clarity around the levy means different companies would be interpreting it in a different way. Some companies could be cautious and paying 12% on these transactions – royalty withholding tax plus the equalisation levy. Others might opt for either 10% or 2% tax.
Technically, foreign companies that receive consideration for software or other products that qualify as a royalty could face double taxation since both royalty withholding tax at 10% and equalisation levy at 2% would be applicable on the same transaction. However, there could also be an additional rise in tax litigation from April 2021 as some companies may choose to pay the 2% levy rather than the 10% tax unless the law is amended.