India has taken the first step to tax the digital economy . An equalisation levy -a deduction of 6% to be made by an Indian payer on payments to a nonresident entity for specified B2B services such as advertising -has been introduced in the Budget.
The levy will impact the bottom lines of giants such as Google, Yahoo and others, which earn ad revenue from business entities in India. In professional tax circles, it has been dubbed `Google tax’. Its introduction is the outcome of a tough battle which India faced during the Base Erosion and Profit Shifting Project (BEPS) discussions, a project spearheaded by the Organisation for Economic Co-operation and Development (OECD). The project aims to bring G20 countries on a single platform to introduce measures to ensure tax transparency and curb avoidance by multinationals (MNCs) through aggressive tax planning. India appears to have won the first round of the battle by introducing the equalisation levy.However, it has a few experts worried as many more digital services could be brought under its ambit. This could dent the interest of e-commerce companies in operating in the country.
It is reliably learnt that the government, on its part, will move cautiously and strike a balance between India earning its fair share of tax and, at the same time, keeping the doors wide open for doing business in the country. Even the date from which the levy will come into effect has not been notified yet.
TOI had on December 9 last year published an interview of Akhilesh Ranjan, then joint secretary (foreign tax) who had led India’s initiative in the BEPS project, on various issues, including taxation in a digital economy. Ranjan had categorically stated that “the value of digital companies is skyrocketing, often with no rational basis. India believes that value is created not merely by production of goods and services, but by the purchasing power of the market where goods and services are consumed“.
India had worked hard to incorporate in the BEPS Action Plan-1 report various tax options which a country could adopt for taxation in a digital economy–including an equalisation levy in the nature of an excise tax. However, the G20 did not arrive at a consensus, with some countries such as the US putting up a stiff resistance.“While the OECD is yet conclude its recommendations on this issue, the Budget has preceded in grabbing India’s share of the digital economy tax pie,“ says Jiger Sa iya, tax partner, BDO India.
Once applicability of this levy is notified, an equalisation levy of 6% will have to be deducted by a business entity in India which makes payments exceeding Rs 1 lakh in the aggregate in a financial year to a non-resident service provider for specified services. For now, specified services include cover online advertisements, provision for digital advertising space or any other facility or service for the purpose of online advertisements–the danger is that the list could be expanded.
“At present, the intent is to levy 6% only on online ad vertisement payments exceeding Rs 1 lakh. But it is interesting to note that the proposed section is wide in its scope and gives powers to the government to expand the definition of specified services in the future. For example, on the e-commerce platform many other services are availed of, such as books, music, games, education, to name a few. This could be a start of a new trend of bringing more services within the ambit of an equalisation levy,“ says Girish Vanvari, partner and tax head at KPMG India.
“The double-whammy for such companies is that it is not an income tax levy, so it would be difficult for foreign companies to claim a tax credit in their home country for the equalization levy withheld in India or to get a reduced rate under a tax treaty,“ adds Shefali Goradia, tax partner, BMR & Associates.
The Budget proposals also prescribe that Indian payers who do not deduct the equalisation levy against payments made by them and do not deposit it with the government will be disallowed such expenditure from computing their taxable profits.In other words, their taxable income will be higher by the amount of the disallowed expenditure, which will mean a higher tax outgo.