The finance minister in his budget for 2016-17 announced the introduction of a new tax called ‘equalisation levy’ on the online advertisement revenue of non-resident companies from B2B transactions. The Finance Bill, 2016, has proposed to insert a separate Chapter VIII in the bill titled ‘Equalisation Levy’ to provide for a new levy of 6% on a non-resident, on the consideration for any “specified service” received or receivable of Rs 1 lakh or more in any previous year from a person resident in India carrying on business or profession, or from a non-resident having a permanent establishment in India. Such income chargeable to equalisation levy shall be exempt from income tax under the Income-tax Act.
Also, the Finance Bill, 2016, has proposed disallowance of expenses in the event the payer defaults in deduction or deposit of the said levy, along with certain other interest and penal consequences. Post the budget announcement, the Committee on Taxation of E-commerce set up by the CBDT released the report titled ‘Proposal for Equalisation Levy on Specified Transactions’, batting for the equalisation levy at a rate between 6% to 8%. The eight-member committee has recommended expansion of the scope of the levy by covering within its ambit not just online advertisements but also 13 other online related transactions such as online marketing, cloud computing, website designing hosting and maintenance, digital space, digital platforms for sale of goods and services, online use or download of software and applications, etc. The report suggests that the rate of the levy be restricted at 6% at the time of its introduction and a rate hike be evaluated in later years.
The apprehension over whether the levy is in the nature of income tax and therefore creditable in the country of residence of the income-receiving foreign companies has been dealt with in the report. The committee clarifies that since the levy on a transaction is, in any case, inherently different from a tax on income, it need not be included within the laws governing tax on income. Accordingly, as per the report, it will be necessary to impose the levy through statutory provisions outside the existing Income-tax Act.
According to the report, introduction of the levy is expected to reduce litigation for foreign companies providing online advertisement services, since the income will now be exempt under the Income-tax Act. In other words, the controversy over whether online advertisement revenue is subject to income tax will be put to rest.
However, there still exists a possibility of the tax office alleging a permanent establishment for the non-resident company and therefore exposing it to income tax at 40% plus surcharge and cess on net basis on the income attributable to the permanent establishment. In such a situation, since equalisation levy is not creditable against such income tax, the foreign companies could be doubly taxed in India. This aspect has not been addressed in the report.
There are other issues such as inability of the payer or the payee to appeal against an order of the tax office imposing such levy, etc, which need ironing out before the levy is made effective. Considering the challenges arising from imposition of the levy, it is likely that the payer and the payee would need to renegotiate their current commercial arrangements, which will determine who would bear this added cost.