 "Equalisation levy levels the playing field for players: Rashmin Sanghvi")
India is possibly the first country to introduce the concept of equalisation levy on specified e-commerce transactions that involves a foreign organisation without a permanent establishment in the country. Rashmin Sanghvi, partner, Rashmin Sanghvi & Associates, and a member of the government-appointed Committee on Taxation of E-Commerce that proposed the levy, explains to Sudipto Dey how the tax will work. Edited excerpts
Could you take us through the logic of imposing an equalisation levy on e-commerce transactions?
First of all, I would like to clarify that this is my personal opinion. I am not representing the e-commerce committee or the Government of India. The law is simple in understanding, compliance and administration but the logic behind equalisation levy is a complex issue of international taxation.
This systemic weakness is fully exploited by multinational companies (MNCs) doing e-commerce business. The BEPS (base erosion profit shifting) Action-1 group was appointed for 'addressing tax challenges of the digital economy'. This group has not recommended any concrete proposal. It has given three options and left it to the individual country to adopt any system it likes. One option is equalisation levy (EL). India has adopted this. This levy also places Indian resident and non-resident e-commerce service providers on a level playing field.
How did the committee arrive at the levy rate of six-eight per cent?
When a non-resident suffers tax deducted at source (TDS) in India, it gets a credit against the tax payable in the country of its residence. For EL, it will not get the credit. Hence, it was considered fit to levy the tax at a lower rate. Now, what should be the rate is a matter of debate. Hence we recommended a range of six per cent to eight per cent. The government chose six per cent.
Is the idea to encourage foreign e-commerce ventures to have a permanent establishment in India and to bring them under the domestic tax net?
The idea is not to encourage either one system, or the other. There are two systems available. Whichever is more beneficial to the MNC may be selected by it - in the sense that if the MNC opens a PE or a subsidiary in India, and supplies the services from India, it will escape EL. As an Indian assessee, it will then be liable to normal tax.
Do you foresee any legal challenges to this levy, given that it has to stand the test of international tax laws and bilateral investment treaties?
In a democratic set-up, challenging any law is possible. The income-tax department is competent to deal with all the challenges.
Why has the committee suggested changes in the Income Tax Act, when the levy stands outside of it?
There are several reasons. To avoid any double taxation within India, an exemption for the revenue taxed under EL is given under Section 10 (50). If the resident payer does not comply with the TDS procedure, he should suffer the same penal consequences as under the Act. This tax is to be administered by the Indian income tax department. Hence, all the machinery and appellate provisions of the Act have been made applicable to EL.
For start-ups, internet advertising is more affordable. When internet advertising is taxed, startups will be affected. Your comments
Well, Indian internet media advertisements are not subject to EL. Is it necessary for a startup to go to foreign media for advertisement? Please appreciate that not taxing the MNC is like subsidising the MNC at the cost of the middle-class of India.
Could you take us through the logic of imposing an equalisation levy on e-commerce transactions?
First of all, I would like to clarify that this is my personal opinion. I am not representing the e-commerce committee or the Government of India. The law is simple in understanding, compliance and administration but the logic behind equalisation levy is a complex issue of international taxation.
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Britain, France, Germany, Australia, India and many countries are seriously concerned that e-commerce companies collect massive revenues from their territories, and pay no tax. The Indian Income Tax Act (ITA) and several countries, the OECD and the UN Models of Double Tax-avoidance Agreements (DTAA) are based on a tax structure almost 100 years old. There is a systemic weakness in the structure. India cannot tax a non-resident of India unless the non-resident has a permanent establishment (PE), a fixed place of business, in India. With modern technology, global business without having a PE is practical. This business is growing very fast. A government cannot afford not to tax e-commerce. For taxing a non-resident e-commerce company, it has to amend its own domestic tax law as a first step. However, until the DTA model is changed, the domestic law amendment will have no impact. The DTAA will override domestic law.
This systemic weakness is fully exploited by multinational companies (MNCs) doing e-commerce business. The BEPS (base erosion profit shifting) Action-1 group was appointed for 'addressing tax challenges of the digital economy'. This group has not recommended any concrete proposal. It has given three options and left it to the individual country to adopt any system it likes. One option is equalisation levy (EL). India has adopted this. This levy also places Indian resident and non-resident e-commerce service providers on a level playing field.
How did the committee arrive at the levy rate of six-eight per cent?
When a non-resident suffers tax deducted at source (TDS) in India, it gets a credit against the tax payable in the country of its residence. For EL, it will not get the credit. Hence, it was considered fit to levy the tax at a lower rate. Now, what should be the rate is a matter of debate. Hence we recommended a range of six per cent to eight per cent. The government chose six per cent.
Is the idea to encourage foreign e-commerce ventures to have a permanent establishment in India and to bring them under the domestic tax net?
The idea is not to encourage either one system, or the other. There are two systems available. Whichever is more beneficial to the MNC may be selected by it - in the sense that if the MNC opens a PE or a subsidiary in India, and supplies the services from India, it will escape EL. As an Indian assessee, it will then be liable to normal tax.
Do you foresee any legal challenges to this levy, given that it has to stand the test of international tax laws and bilateral investment treaties?
In a democratic set-up, challenging any law is possible. The income-tax department is competent to deal with all the challenges.
Why has the committee suggested changes in the Income Tax Act, when the levy stands outside of it?
There are several reasons. To avoid any double taxation within India, an exemption for the revenue taxed under EL is given under Section 10 (50). If the resident payer does not comply with the TDS procedure, he should suffer the same penal consequences as under the Act. This tax is to be administered by the Indian income tax department. Hence, all the machinery and appellate provisions of the Act have been made applicable to EL.
For start-ups, internet advertising is more affordable. When internet advertising is taxed, startups will be affected. Your comments
Well, Indian internet media advertisements are not subject to EL. Is it necessary for a startup to go to foreign media for advertisement? Please appreciate that not taxing the MNC is like subsidising the MNC at the cost of the middle-class of India.