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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.