India: Taxing digital transactions in India
The digital age has given rise to significant tax policy challenges in terms of nexus, characterisation of income and other consequential issues.
The digital age has given rise to significant tax policy challenges in terms of nexus, characterisation of income and other consequential issues. This issue has been a matter of concern in several countries, including India.
Action 1 of the OECD's BEPS Project examined this issue in detail. Specifically, it considered three broad options to address challenges arising from the digital economy. These were: (i) a new nexus test based on significant economic presence; (ii) a withholding tax on digital transactions; and (iii) an equalisation levy. Although the OECD did not outrightly recommend these options, it noted that countries could consider introducing them in their domestic laws, subject to treaty obligations.
Given India's longstanding concerns surrounding digital economy taxation, and more particularly the perceived leakage of revenue on this account, the Indian Government constituted a committee to examine and make recommendations. This led to the introduction (in the annual Budget presented in February) of a proposed tax called the 'Equalisation Levy' on specified services provided by non-residents.
This levy applies at 6% of consideration paid for specified services to a non-resident by:
a resident in India carrying out business; or
a non-resident having a permanent establishment (PE) in India.
There is, however, a specific carve-out for specified services rendered by non-residents who have a PE in India, when the services are effectively connected to the PE. Payers in India are required to deduct the levy amount from the payments made to non-residents and deposit it with the government. Interest and penalty would apply for non-deduction/non-payment of the levy.
The specified services to which this levy applies are online advertisements, provision for digital advertising space or any other facility/services for the purpose of online advertisements. Interestingly, the government is also empowered to notify other services that could fall within the ambit of this levy. The OECD, in its 'Report on the Digital Economy', had highlighted potential concerns around identification of specified transactions in the digital sphere which would be subject to a special levy. These concerns could equally apply in the context of the Indian equalisation levy, and one can expect some uncertainty on this issue going forward.
To avoid double taxation, income arising from payments on which equalisation levy has been paid are proposed to be exempted under Income-tax Law (ITL).
Interestingly, while the government has stated that the equalisation levy is based on the recommendations of the OECD, there is one significant difference. The Indian levy is proposed to be charged, not under ITL, but under a separate chapter of the Finance Bill. This would mean that the levy may not be considered as an 'income-tax', which would take it outside the purview of tax treaties. This would imply that, where an equalisation levy is levied on a transaction, the non-resident recipient may be subjected to double taxation, if its country of residence does not give a corresponding credit for the Indian levy.
Another interesting issue which may arise is whether the levy can be applied to 'advance payments' (made prior to the levy being in force), as the levy is applicable on 'services provided on or after the commencement' of the chapter.
These and several other issues may need to be addressed to minimise uncertainties and avoid litigation.
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