India’s Google Tax

Introduction:

With ever-evolving information technology, the businesses have found unique ways to conduct their businesses just by relying on digital technology. In the last decade or so, business models have emerged that can be conducted primarily by exchange or transmission of data. Digital economy’s salient features may be summed up as mobility, reliance on data including so-called big data, network effects which include user participation, integration, use of multi-sided business models, i.e. market may be in different tax-jurisdictions, Volatility due to low barriers to entry and rapidly evolving technology (Section 4.3 of the BEPS Report on Action 1 and on-line mode – Paragraph 117 of the BEPS on Action 1 (2015)). According to the Government and industry estimates, the digital economy is expected to reach $1 trillion in the next few years.

India’s Initiatives:

In the first instance, the Central Board of Direct Taxes (CBDT) in 2001 set-up a Committee on e-commerce taxation under the Chairmanship of Sri. Kanwaljit Singh. The said committee felt that ‘there is no case for exemption from Direct Taxes. CBDT has set-up another committee on taxation of e-commerce under the Chairmanship of Akhilesh Ranjan. The said committee on Taxation of E-commerce has submitted its report on 21st March, 2016. Committee’s key observations were: i) Redundancy of physical presence in other tax jurisdictions ii) Characterizing the payments for digital goods and services iii) Significant challenges to levy taxes in the source jurisdiction iv) Unfair advantage over domestic players v) The necessity of withholding tax on digital transactions and equalization levy. Its Key recommendations are:  i) Equalization levy may be imposed on payments for specified services. ii) A separate chapter may be included in the Finance Act. iii) The equalization levy may be between 6 to 8 per cent. iv) Exemption of such transactions may be extended u/s. 10 of the Income-tax Act, 1961. v) Implementation and impact of Equalization levy may be monitored on a regular basis. In addition to above and to imply OECD’s obligations on BEPS Action Plans, the Central Government introduced an ‘Equalization Levy’ on 12 digital services which include online advertisement and other related services as a separate chapter in the Finance Act, 2016 with effect from 1st June, 2016.

Post Implementation/ Union Budget 2018:

It is now thirty months since ‘Equalization Levy or ‘Google Tax at 6 per cent’. According to latest media reports, the Government has earned an aggregate ‘Equalization Levy’ between Rs.1,000 cr. to 3,000 cr. Approx. However, it is felt that whatever collected is just a tip of the iceberg.

Business Connection:

Whether the term ‘Business Connection’ is defined in Indian tax laws? Yes, but inserted as an Explanation 1 to Section 9 (1) by the Finance Act, 2003 w.e.f 1-4-2004. A plain reading of the said Explanation reveals that only such part of the income as is attributable to the operations carried out in India are Taxable. Thus, the existence of a permanent establishment would not constitute a ‘business connection.’   A business connection may be in the form of a branch office in India or an agent of a non-resident in India and includes such business activity carried out through a person who is acting on behalf of such non-resident with an authority to conclude such contracts except activities which are limited to the purchase of goods for the non-resident. In case of absence of any such goods, secures orders on behalf of the non-resident that will be treated as a ‘Business Connection’. Exceptions may be summed up as- 1. Any business activity carried through a broker, general commission agent or any other agent but under different management or in his independent capacity. 2. In the case of a non-resident, business activity confined to the purchase of goods in India for the purpose of export. 3. In the case of a non-resident news agency, where business activity confined to the collection of news, etc. 4. In the case of a non-resident business engaged in the business of mining where the activities are confined to the display of uncut and unassorted diamond in any notified SEZ.   5. In the case of a non-resident individual, a firm which does not have any resident partner, a company which does not have any resident shareholder involved in the business of shooting.

Equalization Levy:

Clause (50) of section 10 provides that any income arising from such specified services under clause(I) of section 161 of the Chapter of VIII of the Finance Act, 2016 on or after 01.06.2016 shall be chargeable to ‘Equalisation levy at the rate of 6 percent.’

Compliance – In Brief: