On February 29, 2016 the Finance Minister of India presented the annual fiscal budget for the country. Amidst the global economic worries, there were many expectations on proposals that would stimulate the economy. This apart, a section of the economy was keen on understanding the Government’s stand in dealing with the Digital Economy (DE) in terms of taxability. The FM made a bold choice and proposed to implement an ‘Equalization Levy’ on certain specified Business to Business (‘B2B’) online advertising services provided by non-residents. This levy is an outcome of Base Erosion and Profit Shifting (‘BEPS’) report relating to ‘Addressing the Tax Challenges of the Digital Economy’. BEPS is a joint initiative of various countries for tackling certain specific tax challenges. This report had various important contributions from India and the Government representatives involved in the efforts indicated that India shall implement a tax regime based upon the guidance in the report, even though the report finally recommended the wait and watch approach.
HIGHLIGHTS OF THE LEVY
• ‘Equalization Levy’ has been introduced under a separate code under the Finance Bill, 2016 and not under Income Tax Act, 1961. It would be levied on specified payments exceeding Rs 1,00,000 made by resident payers to non-resident service providers.
• The levy is currently applicable on:
- Online advertisement
- Provision of digital advertising space
- Other facilities for the purpose of online advertisement
- Other services for the purpose of online advertisement
- The Central Government has been authorized to notify additional services
The levy is applicable on the payment for advertising on online platforms. However, it is not clear if by using the term ‘facility’ or ‘services’, the intent is to cover any infrastructure or ancillary services within the purview of this provision. Accordingly, one would need to evaluate the applicability of this provision on the following services:
Sr. No. Facility/Services
1. Composite contract with an overseas creative agency for assistance in content creation and placement on relevant media (including digital)
2. Hiring of overseas studio for shooting an advertisement for digital media
3. Analytical services through proprietary software/ platform for digital advertising
• Taxes are levied at 6%, and the compliance mechanism is akin to that of withholding taxes
- Interest and penalties may be levied on non-compliance and penal provisions extend up to imprisonment
• Non-deduction of levy would lead to disallowance of the expenditure in the hands of payer - The levy is currently on B2B transactions and would likely increase cost of procurement of such services provided by overseas service providers
PRACTICAL CHALLENGES
The levy may be treated as a direct tax, however in practice it is also akin to indirect taxes. Thus, nterpretation issues could occur on availing protection under the relevant Double Tax Avoidance Agreement on such levy. One would need to evaluate the availability of tax credit of such levy paid in India in the home country of the recipient.
An attempt has been made to address double taxation in India by exempting from income tax those receipts upon which levy is charged. Further, the levy is not applicable on nonresident service provider having a business presence (i.e., Permanent Establishment – PE) in India under income tax regime. In such cases, taxability will be governed under the normal income tax provisions. Being a first-of-its-kind levy, it shall be prone to interpretational challenges and may be litigated.
IN SUMMARY
Introduction of the Equalization Levy has been a path-breaking move by India, moreover tax veterans were reminisced of the introduction of service tax law, which occurred in a similar manner. It is for anyone to judge the importance service tax has gained in contributing towards the kitty of the exchequer today. We believe that the list of services subject to the levy may increase gradually, covering majority of typical DE transactions. While the date of implementation of the levy hasn’t been announced, fine reading of the relevant provisions hint that it may come into force in June, 2016. No doubt, the industry will keep a close tab of how this proposal is debated in Parliament.
