Digital Economy: Equalisation Levy

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Customer Care No. 91-11-45562222
Digital Economy Equalisation Levy
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• In this era of technology intertwined lifestyle,
  e-commerce has become a way of life. E-commerce
  seemingly facilitates every other aspect of our
  lives at a click of a button, whether its
  procurement of daily household items or
  requisitioning of any particular service. Today,
  accessibility to the digital world is not a
  privilege but a necessity for most people,
  particularly in urban areas.
• Over the past few decades, the burgeoning
  development of the Information and communication
  technology ('ICT'), its accessibility and
  affordability has led to this digital revolution
  around the world. ICT has also provided
  opportunity to businesses to tap the world
  markets and bridge the requirement of physical
  presence across the globe.

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• The model of doing business electronically has
  provided immense growth opportunities. Digital
  economy across the world is reflecting a growth
  rate of 101 which is significantly higher than
  the growth numbers of the global economy as a
  whole. Research and studies around the world have
  indicated that investment in ICT positively
  affects the productivity and GDP growth of a
  country. Developed countries in terms of ICT
  development have the highest GDP levels, which
  indicates that implementation of ICT in a country
  improves its overall economic health.
• Despite the significance of ICT in overall
  development of an economy, ICT quotient has
  remained low in India. Though, in past few years,
  India has witnessed some successful start-ups in
  this field, development of the concerned
  infrastructure is much needed to capitalise on
  the growth opportunities. Foremost India has to
  bridge the urban-rural hiatus in terms of the
  communication infrastructure. With the NDA
  government vision of Digital India, it is
  expected to embark a digital revolution in India
  and to achieve the desired growth rates.
• Albeit, this model of conducting business through
  the realms of cyberspace has led the enterprises
  in procurement and selling of goods and services
  in different jurisdictions without any physical
  presence in that country, the same has also led
  to severe tax challenges direct as well as
  indirect. The economic presence in a sovereign
  through the world of web has posed direct
  taxation concerns due to absence of physical
  presence in that specific jurisdiction.

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• The development of the cyber economy has captured
  the attention of the taxman of the world
  economies to test their fundamental Permanent
  Establishment rules developed for old 'brick and
  mortar' economies, in the light of the tax
  challenges caused by the new digital business
  models. The digital market has revolutionized
  traditional ways of conducting business around
  the globe, while tax rules have been slow to
  adapt to this new business environment and could
  not come up with the possible solution.
• It is widely felt that MNEs have treaded the path
  of aggressive tax planning thriving upon the
  interaction of tax laws and treaty provisions
  between different sovereigns and have relatively
  paid low amounts of tax or no tax by artificially
  shifting profits away from the economy where they
  are earned, to a more favourable tax
  jurisdiction. This has led to a divide between
  the economic presence in a country vis-a-vis taxab
  le presence in such jurisdiction.
• G202 members have expressed their concern with
  regard to artificial shifting of profits by the
  MNEs to the low or no tax jurisdictions and in
  response thereto announced a coordinated drive
  with Organisation for Economic Cooperation and
  Development ('OECD') to modernise the current
  framework of tax treaties and nationally set
  anti-tax avoidance laws. OECD at the request of
  G20 is leading the initiative of development of a
  strategy to address such profit shifting, through
  its Base Erosion and Profit Shifting project
  ('BEPS'). Since 2012, OECD is working hard to
  achieve the goal to curb the unwarranted tax
  practices by MNEs and has introduced 15 Action
  Plans in mid 20133 highlighting the necessary
  areas of concern, action points to address them
  and the expected outputs of those actions.

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• OECD in its BEPS report Action Plan 14 on
  addressing the tax challenges of the digital
  economy, has highlighted tax neutrality5 as a
  major concern and suggested several options to
  tackle the direct tax challenges which inter-alia
  includes amendment in the Permanent Establishment
  rules, modifying the definition a PE to address
  artificial arrangements through certain
  "conclusion of contracts" arrangements,
  amendments in the OECD's transfer pricing
  guidelines and designing of rules for Controlled
  Foreign Corporations ("CFCS") Rule. Apart from
  the aforesaid the Task Force also considered
  certain other options inter-alia, a nexus test in
  the form of a significant economic presence
  requirement a withholding tax on certain types
  of digital transactions on the payments made by
  the resident to the Non-Resident enterprises for
  the goods and services procured digitally
  charging of an Equalisation Levy to impose equal
  treatment of foreign and domestic suppliers by
  taxing the foreign suppliers for their economic
  presence in that country, but the same were not
  recommended by OECD in its final report on tax
  challenges of the digital economy under Action
  Plan 1.
• In the midst of this debate of challenges and the
  recommendations on taxation of the digital
  economy and majority of the world economies still
  considering the options recommended by OECD,
  India has taken a leap to address the challenges
  in terms of taxation of MNEs having a digital
  economic presence in India without any physical
  presence.Though, UK and Australia too have
  initiated steps to tap the concerns of BEPS by
  introducing "Diverted Profit Tax" and
  "Multinational Anti Avoidance Law" respectively.
• The Indian tax proposals announced wide Union
  Budget 2016-17, suggests introduction of a new
  Chapter VIII forming part of Finance Bill
  separate from the Income Tax Act, 1961 comprising
  17 Sections, an Equalisation Levy of 6 on the
  amount of consideration for the digital
  advertising services provided by a non-resident
  not having a permanent establishment in India to
  a resident in India who carries business or
  profession or to a non-resident having a
  permanent establishment in India.

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