Tax panel for 6% equalisation levy on specified digital services

The Central Board of Direct Taxes (CBDT) on Monday released the Committee of Taxation of E-commerce report, batting for the equalisation levy at a rate between 6% and 8% of the gross payment made for specified services.

The report titled The Proposal for Equalisation Levy on Specified Transaction provides clarity on the issue and "puts to rest" the long drawn debate on it.

Rakesh Nangia, managing partner, Nangia & Co, said, "Experts were speculating on the character of equalisation levy proposed to be levied on specified payment to foreign beneficial owner. While some were of the view that it is in the nature of withholding tax others called it an indirect tax. Release of the e-commerce taxation committee report is timely and has aptly put to rest the unwarranted debate," he said in a statement issued by Nangia & Co.

The eight-member committee, comprising senior officials from the finance ministry and Income-Tax (I-T) department, industry representatives, ICAI representative and independent professionals suggests to restrict the rate of equalisation levy at 6% at the time of its introduction, and evaluate a rate hike in later years.

Its 124-page report recommends levy on specified digital services and facilities including online marketing and advertisements, cloud computing, website designing hosting and maintenance, digital space, digital platforms for sale of goods and services and online use or download of software and applications.

Interestingly, to limits its impact, the committee notes the only payments exceeding Rs 1 lakh made "by a person resident in India or a permanent establishment of a non-resident person to a non-resident enterprise" be covered under the levy.

"Such a threshold (Rs 1 lakh)," says the report, "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 equalisation levy, thereby limiting its impact," observes the e-commerce taxation panel.

In its report, the committee says that it had considered two other options – a new nexus-based on significant economic presence and the withholding tax on digital transactions – but found the equalisation levy as most suited for India.

"The third option of equalisation levy provides a simpler option that can be adopted under domestic laws without needing amendment of a large number of treaties," the committee report states.

The committee also noted that the report had the approval of G-20 countries, including India and Organisation for Economic Cooperation and Development (OECD).

According to the report, the levy would help in reducing the tendency of "multinational enterprise" to avoid taxes completely in the source jurisdiction and provide a level playing field for domestic players in the ecommerce space.

"The unfair advantage enjoyed by them over their Indian competitors can make Indian enterprises, both digital as well as brick and mortar ones, relatively less competitive in the long run, resulting in detrimental impact on growth of Indian enterprises," notes the report.

The committee has said the levy would also do away with the adverse impact on revenue collection of the government due MNCs escaping from tax payments in India. This was resulting in rising "tax burden" on domestic enterprise and citizens. It ask for addressing the issues without any "further delays".

Rakesh Jariwala, tax partner - media & entertainment, EY said the implementation of equalisation levy would be very crucial.

"It is therefore 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 EQL (equalisation levy) or income tax will apply on a transaction. Else the transaction could lead to double taxation – EQL as well as income tax," said Jariwala.

A report by Boston Consulting Group (BCG) had estimated in 2012 that there would be three billion internet users across the world by 2016 and the digital economy, which contributed $2.3 trillion in G20 countries in 2010, would expand to $4.2 trillion.

The consultancy firm also said the digital economy was growing at 10% a year, significantly faster than the global economy, and with increasing penetration, the emerging economies were becoming the drivers of innovations.
According to Google India, there were 35 million online shoppers in India in first quarter 2014, which is expected to cross the 100-million mark by end of the 2016.

As per the government data, India's e-commerce market was worth about $3.8 billion in 2009 and grew more than three times to $12.6 billion in 201.