Finance ministry to clarify on equalisation levy

The finance ministry is likely to address anomalies arising out of a Budget proposal to impose a six per cent equalisation levy on advertisement revenues received by digital companies such as Google and Facebook.

The issue arises because the levy was proposed in the Budget as part of the finance Bill and not as income tax. As such, the companies getting the brunt of the levy would not be able to take the benefit of tax treaties to avoid double taxation in their home countries, explained Neeru Ahuja, partner with Deloitte Haskins & Sells.

Even with the countries with which India does not have a double taxation avoidance agreement, credit could be given in the home country, had the levy come as part of the Income Tax Act, she said.

The Finance Bill provides a special Chapter VIII to deal with the new levy.

The memorandum explaining the provisions of the Bill said, "To address these challenges (from digital companies), it is proposed to insert a new chapter titled 'Equalisation Levy' in the Finance Bill, to provide for an equalisation levy of six per cent 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."

The services specified include online advertisements, provision for digital advertising space or any other facility or service for the purpose of online advertisements.

The move is expected to hit not only Google, Facebook, Yahoo and others, but also many digital services and start-ups that rely heavily on digital advertising. "We are considering the request to clarify the position in this regard," said a finance ministry official.

DOUBLE TAXATION DILEMMA

• The finance ministry is likely to address the anomalies arising out of a Budget proposal to impose 6% equalisation levy on advertisement revenues received by digital companies such as Google and Facebook
• The issue arises because the levy was proposed in the Budget as a part of the Finance Bill and not as income tax
• As such, the companies bearing the brunt of the levy would not be able to enjoy the benefit of tax treaties to avoid double taxation in their home countries, said Neeru Ahuja, partner at Deloitte Haskins & Sells
• Double Taxation Avoidance Agreement (DTAA) is between two nations and aims to avoid or eliminate double taxation of the same income in two countries

It is yet to be seen if the clarification will come as part of the reply to the Finance Bill, which happens only after the recess of the Budget session or as part of the rules to be notified later. The Budget proposed such a levy after the Organisation for Economic Cooperation and Development (OECD) has recommended it, in Base Erosion and Profit Shifting project under Action Plan 1.

As such, there is no plan to take away the levy. In fact, India is the first country to impose the levy following OECD recommendations. While OECD had proposed the tax as indirect tax such as value added tax or goods and services tax, India imposed it as direct tax.

The Budget said the digital economy was growing at 10 per cent per year, significantly faster than the global economy as a whole.

"These new business models have created new tax challenges. The typical direct tax issues relating to e-commerce are the difficulties of characterising the nature of payment and establishing a nexus or link between a taxable transaction, activity and a taxing jurisdiction, the difficulty of locating the transaction, activity and identifying the taxpayer," it said.

However, the Budget spared those companies that received such income up to Rs 1 lakh a year from this levy.