The income tax department has specified the jurisdiction of officers in its international taxation wing under whom the companies would be assessed for 2 percent equalisation levy, commonly known as 'digital tax'. Over two dozen non-resident tech companies would come under the purview of the equalisation levy as proposed in 2020-21 Budget.
It came into effect from April 1, 2020 and its first instalment is due on July 7. The 2 percent tax would be levied on consideration received by e-commerce operators from e-commerce supply or services.
Experts said as the first due date for payment of the equalisation levy is fast approaching, the income tax authorities seem to be working steadily towards the implementation of this new tax and chances of its deferment look bleak.
"Equally important would be for the government to clear air on tangled issues such as need for non-resident e-commerce operators to have income tax registration in India for payment of equalisation levy, application of levy on gross consideration or commission income for platform based business models and corresponding exemption under the Income Tax Act to avoid double taxation," Nangia Andersen LLP Partner Sandeep Jhunjhunwala said.
In an order dated May 29, the Principal Chief Commissioner of Income Tax (International Taxation) authorised Assistant Commissioner of Income Tax (ACIT) / Deputy Commissioner of Income Tax (DCIT) as the Assessing Officer and specified their jurisdiction in respect of assessees for the purpose of equalisation levy.
Equalisation levy was first introduced by the Finance Act, 2016, at the rate of 6 percent on payments for digital advertisement services received by non-resident companies without a permanent establishment (PE) here, if these exceeded Rs 1 lakh a year.
The Budget 2020-21 expanded its scope to include consideration received by non-resident e-commerce operators from e-commerce supply or services. The rate applicable was set at 2 percent.
This came as a surprise to the international trade partners of the country. Last month, a group of nine business bodies, representing mostly American, European, Australian and Asian companies, had written to Finance Minister Nirmala Sitharaman seeking deferment of the 2 percent tax imposed on non-resident e-commerce companies by nine months due to the crisis triggered by COVID-19.
Non-resident e-commerce operators are those firms that sell goods and services to Indian residents online, but do not have presence in India.
Meanwhile, the US has decided to start an investigation under Section 301 of the Trade Act, 1974, into the digital services taxes that have been adopted or are being considered by a number of countries, including India, to "unfairly" target American tech companies.
Other countries against whom the investigations might be initiated include Austria, Brazil, the Czech Republic, the European Union, Indonesia, Italy, Spain, Turkey and the UK.
Digital tax has been a vexed issue globally in recent years. OECD has produced multiple papers and alternatives for digital taxation but no consensus has been reached on the matter. In the absence of any multilateral or globally agreed upon approach, countries have started imposing digital tax in different ways on a unilateral basis.
France had in 2019 introduced a similar levy on digital transactions which resulted in the US imposing higher tariffs on import of French products like wine and cheese. France agreed to put the levy on hold and enter into a multilateral discussion and negotiate at the OECD level, experts said.
Jhunjhunwala said India's equalisation levy brings with itself complex questions and ambiguities, including the possibility of double taxation of income in the absence of access to foreign tax credit as per tax treaties.
"With approximately USD 27 billion worth service exports to India in 2019, USA is the most affected stakeholder by this new tax regime.
"The current investigation has invited public comments and will primarily deal with issues like unreasonableness of tax policies, diverging provisions from US tax laws, extra-territorial rights and whether the digital tax mechanism is being used to penalise technology giants for their atypical success graph or for being crisis-proof in current times.
"India is racing towards becoming a digital giant, and one needs to wait to see if the details of this new levy would be negotiated to avoid any hurdles in its implementation," Jhunjhunwala said.