AN

DIGITAL_TRANSACTION_TAX

Overview

  • BEPS: Base Erosion and Profit Shifting, a problem where businesses exploit gaps and mismatches in tax rules.

Action 1: Digital Economy

  • Objective: Address tax challenges arising from digital economy.

  • PE Rule Modification:

    • Require modification to existing Permanent Establishment (PE) rules.

    • Digital presence could create a PE.

    • Definition includes a virtual fixed place of business when a website maintained on another entity's server engages in business activities.

Withholding Tax on Digital Goods and Services

  • New Tax Measures:

    • Imposition of final withholding tax on payments for digital products or services by foreign e-commerce providers.

    • Equalization levy applied on transactions involving non-residents.

Equalization Levy - 1

  • Introduction: Introduced by Finance Act 2016 under Section 165.

Amendment to Indian Taxation Regime

  • Chapter VIII - Equalization Levy:

    • Introduced to levy 6% on consideration for specified services from non-residents without PE in India.

    • Applicable when service is provided to a resident or a non-resident with PE in India.

Basics of Charge

  • Services Subject to Levy:

    • Applies to online advertisements and digital advertising services.

    • 6% charge on total consideration.

Exclusions from the Levy

  • No levy applies if:

    • Non-resident has PE in India.

    • Services are B2C transactions.

    • Revenue is below ₹1,00,000.

Collection and Recovery Mechanism

  • Obligations:

    • Payer deducts and deposits Equalization Levy (EL).

    • Service provider is not responsible for the payment.

Finance Act 2018

  • Significant Economic Presence:

    • Introduced as a criterion for taxation.

    • Non-resident triggers tax obligations by:

      • Exceeding specified revenue threshold through transactions in India.

      • Systematic soliciting business through digital platforms.

    • Activation for this provision deferred to April 2021.

Equalization Levy - 2 (2020)

  • Key Features:

    • Applicable on non-resident e-commerce operators.

    • Charge rate: 2% of consideration.

    • Chargeable on e-commerce supply or services.

    • Payments due quarterly.

    • Non-compliance can lead to recovery from payer.

Detailed Scope and Collection Process

  • Basic Charge:

    • EL is 2% of amounts received via e-commerce.

    • Applies to transactions targeting Indian customers or IP addresses in India.

Definitions

  • E-commerce Operator:

    • Non-resident managing online platforms for sale/services.

  • Online: Services accessed via the internet or digital networks.

  • E-commerce Supply or Services: Includes online sales or provision of services facilitated by the operator.

Exclusions from EL 2

  • No levy applies if:

    • E-commerce operator has a PE in India linked to the online supply or services.

    • Sales/turnover from e-commerce is below ₹2 Crores or £0.20 Million.

Case Studies on B2C and B2B Transactions

  • Case 1: B2C transactions for laptops.

  • Case 2: B2B transactions with invoicing and payment conducted online.

  • Case Study III: Offline contracts involving payment and delivery considerations.

Case Studies on Service Provision

  • Service Provision Examinations:

    • Analysis includes online database access and transactions for hotel bookings.

E-commerce and Equalization Levy Interactions

  • Royalty & FTS Implications:

    • Consider how EL intersects with royalty or foreign tax structures.

Compatibility with International Law

  • Legislative Consistency: Must align with international obligations.

  • Most Favoured Nation (MFN) Treatment: No discrimination across nations.

  • National Treatment Mandates: Evaluating effects on international suppliers.

Concerns with Arbitrary Provisions

  • Assessment and Appeals: Highlight issues within the taxation process, including lack of independent determination and penalties without due process.

  • Residency Determination: Challenges faced by non-residents in identifying customer residency.

Issues of Extra-Territoriality

  • Legal questions regarding transactions sourced outside India.

Examples Illustrating Taxation

  • Case Example 1: Indian resident purchasing abroad, highlighting challenges of different jurisdictional rules.

  • Case Example 2: Considering advertising placements based on residency of users.

Conclusion

  • OECD Pillar 1: Reflections on broader implications in global taxation frameworks.