Recently, the Committee on taxation of E-Commerce has released its report. The committee was formed with an aim to examine the tax panel issues arising from the new business models employed in the digital economy, in particular, issues relating to tax nexus rules under existing law and tax treaties, characterization of payments made for services and facilities provided primarily through digital means and issues related to valuation of data and user contribution in profits of digital enterprises. The committee consisted of officers of CBDT, representatives from the industry, the Institute of Chartered Accountants of India and tax experts.
The Committee took cognizance of the Report on Action 1 of Base Erosion & Profit Shifting (BEPS) Project, wherein very significant work has been undertaken for identifying the tax challenges arising from digital economy, the possible options to address them and constraints likely to be faced. The Committee also notes that this report has been accepted by G-20 countries, including India and OECD, thereby providing a broad consensus view on these issues. It also took note of the work done in this field by other experts, as well as the lack of uniformly accepted standards in taxation of royalty and fee for technical services, and the resultant tax disputes. The divergent approaches to characterization of such income taken by the taxpayers, tax panel authorities and appellate authorities, and the litigation arising from such inconsistencies were also given equal significance.
Some of the major recommendations of the Committee are the following;
Equalization Levy at the rate of 6-8% may be imposed on payments to non-residents as consideration for specified digital services by a separate chapter in the Finance Act, 2016.
A separate chapter should be made in the finance Act for the “Equalization Levy” which is will not form part of the income-tax.
Equalization Levy should not be charged unless the consideration received for specified services in a year from a person in India is more than one lakh rupees.Equalization Levy should also not be charged on payments received by a permanent establishment of a non-resident in India, which are attributable to that permanent establishment and taxable under Income-tax Act, 1961.
The committee also suggests corresponding changes to the Income Tax Act, 1961.
Any income arising from a transaction on which Equalization Levy has been paid should be exempted from income-tax, by necessary amendment in Section 10 of the Income-tax Act, 1961
The allowability of the payment as an expense for determining the taxable profits under the Income-tax Act, 1961 may be linked with the payment of Equalization Levy, similar to the allowability under Section 40 of that Act, including the allowance of such deduction in the year in which it is paid.
Read the full text of the report here.
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