CBDT proposes equalisation levy on specified digital services

Q: I remember interviewing you shortly after Arun Jaitely’s Budget speech, once the fine print had come out, when we realised there is going to be this equalisation levy, today you have seen a committee also come out with its report. My first question to you is India taking a lead when it comes to this equalisation levy, taking a lead when it comes to what is called the Google Tax, what do you think is going to be the impact on a burgeoning industry which is of course the digital industry I am talking about?

A: The committee has come up with a report and even while this report is sort of being studied and the ink is drying on the report, the Budget already proposes the levy of equalisation tax on a couple of transaction which is in the nature of online advertisement and digitised services. The report indicates that it is just over a period of time that this will be extended to several other transactions also.

Now, the report seems to suggest that while the OECD, which setup a committee on base erosion and profit shifting, is coming up with its own set of recommendations. This is sort of an interim solution, so, the committee’s recommendation is 6-8 percent, the government in its Budget proposal has specified 6 percent for certain types of transactions. India as you rightly said is the first country in the world to go ahead and implement the levy of this transaction.

The question really is consistent with what I mentioned to you is that is this really a direct tax or an indirect tax because remember this is not under the Income Tax Act, this is a levy under the Finance Bill or what will be the Finance Act. It is not something which is creditable in the home country because it is not a levy under the Income Tax Act and the world will be watching to see how India deals with it and how to respond to this.

Q: So because it cannot be treated as a pass through what do you think is going to be the impact on the pricing when we talk about the digital industry?

A: Pricing would largely be a function of the relative bargaining capacity between the parties. That said, if a person is advertising, for example or is using digital advertising services, the two services on which the levy is proposed, the person who is receiving the income is more likely than not to come back and say that since this is not a creditable levy, the levy should be borne by the payer of the services and therefore needs to be grossed up.

Therefore the chances are, as I said subject to the negotiation capability of the parties concerned, that the Indian advertiser will apart from having to pay for the advertisement charges also have to suffer this levy on a grossed up basis.

So, in that sense if you see today, there is a 15 percent reverse service tax which is payable on overseas advertisement. Now in addition to that 15 percent service tax, there will have to be  this other additional levy which needs to be picked up by the advertiser.

Q: Would you have liked to have seen this as a levy, you have said this is not part of the Income Tax Act, there are some people who are saying that maybe it could have been done and worked the way the securities transaction tax (STT) works?

A: The way this has been levied, as I said, is that it is partly covered by the Income Tax Act meaning that if taxes are not withheld as has been required under the levy then the amount paid is not allowable under the provisions of the Income Tax Act. Once taxes are withheld, the recipient is not required to pay any income tax on the transaction at all. So, it is partly something which is covered by the provisions of the Income Tax Act except the equalisation levy itself is not under the Income Tax Act and therefore not creditable.

The reason I can appreciate why this levy has not been put under the Income Tax Act is that if the recipient is covered by a tax treaty then he might either get an exemption or whatever is and that is where probably India is a little bit at disconnect with what has been proposed by the Organization for Economic Cooperation and Development (OECD) because the OECD recommended three different methods on the basis of which a levy could be made but came back to say that whichever method is chosen, the country has to be mindful of its tax treaty obligations. By putting the levy outside of the Income Tax Act, a question which would arise is whether India is mindful of its tax treaty obligations.