The Indian government on Monday released a high level report that appears to have influenced Finance Minister Arun Jaitley’s February 29 budget proposal for a 6 percent equalization levy on e-commerce transactions.
The report, prepared by the Central Board of Direct Taxes’ subcommittee on taxation of e-commerce, concludes that India needs to modify existing international tax laws to ensure that digital transactions are taxed and reviews options for taxing these transactions suggested in the OECD/G20 base erosion profit shifting (BEPS) final report under action 1.
The report analyzes three suggested BEPS report measures for taxing the digital economy, namely, a new nexus based tax on significant economic presence, a withholding tax on digital transactions, and an equalization levy on e-commerce transactions. The report concludes that an equalization levy is most suited to India.
The committee said that the equalization levy would be a simpler option and would not require India to amend its tax treaties.
“India has taken a lead in taxing the digital economy,” concludes Indian tax expert, Shefali Goradia, a partner with BMR & Associates.
Goradia said the committee seems to draw inspiration from UK’s diverted profit tax and Australia’s multinational anti avoidance law. She added, though, that India’s attempt to tax the digital economy without waiting for international consensus may be “out of turn.”
Goradia said that while the Finance Minister’s budget proposal would only apply the equalization levy currently to online advertisements, the committee recommends imposition of the levy on many more categories, including on sale of digital goods and services, website hosting, and cloud computing.
The government may make more categories of digital goods and services subject to the levy at a later date Goradia said.
She also noted that the committee proposes that the equalization levy be imposed, not as an income tax, but as an additional tax, drawing precedence from the service tax and securities transactions tax which are a part of the Finance Act.
The committee argues the since the equalization levy is on gross consideration paid, it is not in the nature of income tax and hence should not be covered by tax treaties, Goradia said.
Other countries are free to grant credit for the levy in their domestic law, though, and India may grant a credit too, should other countries decide to impose the levy, she noted.
Goradia added that, because foreign companies having a permanent establishment in India are exempt from this levy, the committee hopes that companies will be discouraged from artificially avoiding permanent establishment status in India.
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