Equalisation levy [Chapter VIII of the Finance Act, 2016]Related amendment in sections: 10 & 40(a)

 (i) Growth of e-commerce and concerns emerging therefrom:

(1) The rapid growth of information and communication technology has resulted in substantial expansion of the supply and procurement of digital goods and services everywhere, including India. The digital economy is growing at 10% per year, significantly faster than the global economy as a whole.

(2) At present, in the digital domain, business may be conducted without regard to national boundaries and may dissolve the link between an income-producing activity and a specific location. Hence, business in digital domain doesn’t actually occur in any physical location but instead takes place in “cyberspace.” Persons carrying business in digital domain could be located anywhere in the
world. Entrepreneurs across the world have been quick to evolve their business to take advantage of these changes. It has also made it possible for the businesses to conduct themselves in ways that did not exist earlier, and given rise to new business models that rely more on digital and telecommunication network, do not require physical presence, and derives substantial value from data collected and transmitted from such networks.

 

(ii) Taxation issues relating to e-commerce:

These new business models have created new tax challenges. The typical taxation issues relating to e-commerce are:

(1) the difficulty in characterizing the nature of payment and establishing a nexus or link between a taxable transaction, activity and a taxing jurisdiction,

(2) the difficulty of locating the transaction, activity and identifying the taxpayer for income tax purposes.

The digital business, thus, challenges physical presence-based permanent establishment rules. If permanent establishment (PE) principles are to remain effective in the new economy, the fundamental PE components developed for the old economy i.e. place of business, location, and permanency must be reconciled with the new digital reality.

 

(iii) OECD Recommendations under Action Plan 1 of the BEPS project:

The OECD has recommended several options to tackle the direct tax challenges which include:

(1) Modifying the existing Permanent Establishment (PE) rule to provide that whether an enterprise engaged in fully de-materialized digital activities would constitute a PE, if it maintained a significant digital presence in another country’s economy.

(2) A virtual fixed place of business PE in the concept of PE i.e., creation of a PE when the enterprise maintains a website on a server of another enterprise located in a jurisdiction and carries on business through that website.

(3) Imposition of a final withholding tax on certain payments for digital goods or services provided by a foreign e-commerce provider or imposition of a equalisation levy on consideration for certain digital transactions received by a non-resident from a resident or from a non-resident having permanent establishment in other contracting state.

Taking into consideration the potential of new digital economy and the rapidly evolving nature of business operations, it becomes necessary to address the challenges in terms of taxation of such digital transactions.

(iv) Equalisation Levy – Insertion of Chapter VIII in the Finance Act, 2016:
In order to address these challenges, Chapter VIII of the Finance Act, 2016, titled “Equalisation Levy”, provides 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 in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India.

(v) Meaning of “Specified Service”:

(1) Online advertisement;

(2) Any provision for digital advertising space or any other facility or service for the purpose of online advertisement;

Note – Specified Service also includes any other service as may be notified by the Central Government.

(vi) Relief to small players in the digital domain:

Further, in order to reduce burden of small players in the digital domain, it is also provided that no such levy shall be made if the aggregate amount of consideration for specified services received or receivable by a non-resident from a person resident in India or from a non-resident having a permanent establishment in India does not exceed ` 1 lakh in any previous year.

(vii) Provisions of new Chapter on Equalisation Levy:

To provide certainty and to avoid interpretational issues, certain terms and expressions used therein have been defined. Further, the procedure to be adopted for collection and recovery of equalisation levy has been provided.

In order to provide for the administrative mechanism of the equalisation levy, the new Chapter provides for statutory authorities and also prescribes the duties and powers of the authorities to administer the equalisation levy. In order to ensure effective compliance, interest, penalty and prosecution in case of defaults have been included with sufficient safeguards.

(viii) Central Government empowered to make rules:

Further, the Central Government is empowered to make rules for the purposes of carrying out the provisions of this Chapter. Also, every Rule made under this Chapter shall be laid before each House of Parliament.

Accordingly, vide Notification No.38/2016 dated 27.5.2016, Equalisation Levy Rules,2016 were notified, which come into force on 1st June, 2016.

(ix) Consequential amendments in the Income-tax Act, 1961:

	Section	Provision
(1)	10(50)	In order to avoid double taxation, new clause (50) has been inserted in section 10 to exempt any income arising from providing any specified service on or after the date on which the provisions of Chapter VIII of the Finance Act, 2016 comes into force, and chargeable to equalisation levy under that Chapter.
(2)	40(a)(ib)	In order to ensure compliance with the provisions this Chapter, clause (ib) has been inserted in section 40(a) to provide that if any consideration is paid or payable to a non-resident for a specified service on which equalisation levy is deductible, and such levy has not been deducted or after deduction, has not been paid on or before the due date under section 139(1), then, such expenses incurred by the assessee towards consideration for specified service shall not be allowed as deduction. However, where in respect of such consideration, if the equalisation levy has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date specified under section 139(1), such sum shall be allowed as deduction in computing the income of the previous year in which such levy has been paid