Issue/Justification

The Finance Act, 2016 has introduced a levy of 6% on consideration paid or payable by an Indian resident carrying on business or profession, or by an Indian permanent establishment of a non-resident to a non-resident not having a permanent establishment in India, for providing specified online advertisement services.

Suggestion

The responsibility for payment is cast on resident payer to deduct and deposit the levy. Interest and penalty are levied for delay or failure of compliance. This involves additional cost of compliance to Indian businesses. 

The equalization levy is a separate levy under the Finance Act and is not a part of the Act. The non-resident liable to equalization levy will not be able to claim credit for the levy paid in India in the country of his residence. This will lead to double taxation of the same income.

Non-residents are liable to pay service tax in India on the above receipts.

It is recommended that Chapter VIII should be omitted.


Chapter VIII of the Finance Act, 2016- Equalization Levy Issues to be addressed

Issue/Justification

The Finance Act, 2016 has inserted a new Chapter VIII titled “Equalisation Levy” to provide for an equalisation levy of 6% of the amount of consideration for specified services received or receivable by a non- resident not having permanent establishment (‘PE’) in India, from a resident in India who carries out business or profession, or from a non- resident having permanent establishment in India. In other words, the Finance Act, 2016 enacted a levy of 6% on consideration paid or payable by an Indian resident carrying on business or profession, or by an Indian permanent establishment of a non- resident to a non-resident not having a permanent establishment in India, for providing specified online advertisement services.

Certain issues arising from the same are as below:

  • The responsibility for payment is cast on resident payer to deduct and deposit the levy. Interest and penalty would be levied for delay or failure of compliance. This would involve additional cost of compliance to Indian businesses. It is an indirect levy.
  • The equalisation levy is a separate levy under the Finance Act, 2016 and will not be part of the Income tax Act, 1961. This results in defeating the option available to a non-resident of choosing the more beneficial option between the Treaty and  the Income-tax Act, 1961.
  • Also, the non-resident may not be able to claim tax credit of this levy in his country of residence, if the DTAA allows foreign tax credit in respect of tax paid under the Act and not in respect of similar taxes paid which are outside the ambit of the Income-tax Act, 1961. It is recommended that the provision be withdrawn or be enacted under Act.

Suggestion

In view of the issues detailed, it is suggested that suitable amendments may be carried out in the Chapter VIII of the Finance Act, 2016. Particularly, after 1 April 2017, GAAR will ensure that artificial avoidance of taxable presence is not likely to remain tax protected for the non-residents.

Source-  ICAI Pre- Budget Memorandum–2018 (Direct Taxes and International Tax)
Source-  ICAI Pre- Budget Memorandum–2018 (Direct Taxes and International Tax)

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Tags : Budget (1957) Budget 2018 (401) ICAI (2751)

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