Tax panel wants 6-8% levy on most digital services

A high-level government committee has recommended a 6-8 per cent tax on several online services such as online advertising, cloud computing, website-hosting, digital platforms for sale of goods and services or download of software and applications, provided by a company not resident in India. Committee on Taxation of E-Commerce, set up by the Central Board of Direct Taxes (CBDT), recommended that payments of over Rs.1 lakh made by a resident individual or company to a non-resident enterprise will be covered by this levy.

“Such a threshold will keep almost all B2C (business to consumer) transactions as well as a very large number of B2B (business to business) transactions outside the scope of the equalization levy, thereby limiting its impact,” according to the committee’s report.

The report was submitted to Finance Minister Arun Jaitley prior to the Budget, based on which he proposed a fee of 6 per cent to be levied only on online advertising and restricted to B2B transactions.

However, there are other recommendations made in the report that Mr. Jaitley is yet to implement.

“The Committee’s recommendation is to impose this levy on sale of digital goods and services, including website hosting, cloud computing etc,” Shefali Goradia, Partner, BMR & Associates said.

“Though the Budget proposal is to apply this levy currently only on online advertisements, more categories of digital goods and services may be added later.

“It is imperative that the government not only lays down clear guidelines around the transaction covered under the levy but equally, the manner of determination as to whether the equalisation levy (EQL) or Income Tax will apply on a transaction,” Rakesh Jariwala, Tax Partner - Media and Entertainment, EY said. “Else, the transaction could lead to double taxation—EQL as well as Income Tax.”

The equalisation levy follows the Base Erosion and Profit Shifting (BEPS) report, endorsed by the G20 and OECD, which sought to put forth a global standard for taxing e-commerce. The issue with e-commerce is that the services are often provided by companies that have no office space in the country where the service is rendered and so are not subject to tax, providing them an advantage over domestic players. The other issue, that experts feel needs to be addressed, is based on whom the onus of payment of the levy will fall.

“One important issue which the committee has taken cognisance of is that putting the onus of payment of the levy on the payment gateways and authorised foreign exchange dealers can reduce the obligation on the service purchaser,” Amit Maheshwari, Managing Partner, Ashok Maheshwary & Associates told The Hindu. The onus of the levy proposed by Mr. Jaitley fell on the service purchaser, which the industry felt was unfair. “The industry has reacted strongly to the equalisation levy as it could significantly drive up the cost of advertising online,” Chaaya Baradhwaaj, Founder-Managing Director, BC Web Wise said.

“However, it’s not enough to prevent platforms like Google and Facebook from hiking their ad rates to offset the 6 per cent levy or refusing to recognise it altogether,” Ms Baradhwaaj said.

Experts feel that the government has to bring in greater clarity on how the levy will be implemented, to whom it will apply and whether it will be distinct from Income Tax. “In their (Committee) view, since equalisation levy is on gross consideration paid, it is not in the nature of Income Tax and hence should not be covered by tax treaties,” Ms. Goradia said.

“The report states that the other countries are free to grant credit for this levy as per their domestic law. In future, if the other countries impose equalisation levy, India may consider granting credit on a reciprocal basis. “This levy is India’s attempt to tax the digital economy in a non-adversarial manner and at the same time demonstrate its commitment to the global BEPS project and of course to raise more revenues for the country,” Amarjeet Singh, Partner – Tax, KPMG in India, said.