DIGITAL TRANSACTION TAX

BEPS Overview

• BEPS: Base Erosion and Profit Shifting, refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.

Action 1: Addressing Digital Economy Tax Challenges

• Modifications to Permanent Establishment (PE) Rule:

  • Introduce a significant digital presence as a condition for PE.

  • Definition includes maintaining a virtual fixed place of business, e.g., a website on another enterprise's server.

  • Businesses conducting fully digital activities in a foreign jurisdiction may be treated as having a PE if they maintain a significant digital presence.

Final Withholding Tax on Digital Services

• Imposition of a withholding tax:

  • Applies to payments for digital goods/services by non-resident e-commerce providers.

  • Alternatively, the imposition of an equalization levy on certain digital transactions from non-residents.

Equalization Levy - Section 165 of the Finance Act 2016

• Introduction of Chapter VIII:

  • Implemented to levy 6% on consideration for specific services received by non-residents without PE in India.

Charge Basics

• Conditions for Charging Equalization Levy:

  • Applicable for online advertisements and digital advertising services.

  • Levy rate is 6% based on the consideration received.

Exclusions from Equalization Levy

• Non-resident service providers with a PE in India or transactions under B2C.

• Exemption for small players with revenues below 1,00,000 INR.

Collection and Recovery of the Equalization Levy

• Responsibility:

  • The payer must deduct and deposit the levy.

  • The service provider is not held responsible for payment.

Finance Act 2018: Significant Economic Presence

• Definition of Significant Economic Presence (SEP):

  • Includes online transactions of goods or services above a prescribed payment threshold.

  • Continuous solicitation of business through digital channels.

  • Effective from April 2021.

Overview of Equalization Levy 2 (2020)

• Basic Charge:

  • 2% on the consideration paid for e-commerce supplies or services provided by non-resident operators.

  • Chargeable regardless of the payment's destination—quarterly payments required; defaults lead to recovery from the payer.

E-commerce Operator Definition

• A non-resident entity managing platforms for online sales of goods/services.

• Definitions for online services and supply included.

Exclusions from Equalization Levy 2

• Operators with PE in India, transactions under previous Equalization Levy, revenues below specified thresholds.

Case Studies in Different Transaction Models

• Case 1: B2C transactions (sale of laptops online).

• Case 2: B2B transactions with online contracting.

• Further Scenarios: Involving facilitation through marketplace models and service provisions utilized online.

Compatibility with International Law

• Legislative Powers:

  • Governed under Article 245 with adherence to international commitments.

• Questions on compliance with GATT and GATS agreements raised.

Treaties Impact

• Most Favoured Nation (MFN) Treatment:

  • Chapter VIII might not breach MFN obligations as it doesn't discriminate.

• National Treatment:

  • Imposing extra costs on foreign operators affects services from outside India, raising issues of fairness.

Issues Arising from Definitions and Treatment

• The definition of e-commerce operator biases non-residents, going against long-standing principles of tax law.

Arbitrariness and Assessment Mechanisms

• Concerns about irrational assessments and penalties without a proper framework for appeals.

• Challenges with obligations placed on non-resident operators to identify residencies of customers.

Assessment Processes and Legal Challenges

• Absence of separate orders for imposing the Equalization Levy raises legal confusion; suggestions that assessments could be struck down based on constitutional grounds.

• Creates potential risk for operators unaware of customers’ residency statuses.

Examples of Application

• Scenarios provided, e.g., an Indian visiting the UK and making purchases, questioning the application of equalization levy in purely foreign transactions.

Final Considerations

• Examples of how the equalization levy interacts with various digital transactions and the need for clear guidance on compliance and legal recourse.