India proposes to widen scope of digital services to impose equalisation levy

A panel formed by the Indian tax authorities to study the scope of taxation of different companies operating in the Indian e-commerce space has suggested to include a wide range of services to be brought under the ambit of the proposed 6 to 8 percent equalisation levy. The panel's report submitted Monday could hit revenues of global firms such as Google, Facebook and Twitter.

The above-referred companies generate huge revenues from advertisements placed on their websites by Indian vendors selling their products and services. Such Indian vendors would have to deduct the equalisation levy on payments while making payments to overseas firms such as Google.

The proposed levy will be confined to B2B transactions, according to the panel.

The Committee on Taxation of Ecommerce, in its report said that the equalisation levy should be imposed on revenues received by a non-resident from a resident in India or a permanent establishment in India "as a consideration for the specified digital services."

"India has taken a lead in taxing digital economy. The report is fairly comprehensive and has examined various dimensions of imposing a new tax on digital economy," said Shefali Goradia, partner, BMR & Associates LLP, in a statement. 

Rationale behind the proposed equilisation levy

• India's e-commerce market was estimated to be worth about $3.8 billion in 2009, which went up to $12.6 billion in 2013. In 2013, the e-retail segment was worth $ 2.3 billion.
• Social media updates was the top choice for achieving maximum customer engagement (46%) followed by email campaigns (28%), according to a research conducted by octane.in.
• These figures clearly indicate that digital means of communication and social interaction are giving rise to new businesses that did not exist very long ago.
• The number of internet users in India was expected to have reached 402 million by December 2015, according to  a report by the Internet and Mobile Association of India (IAMAI) and IMRB. 
•  The asymmetry in tax burden between Indian and multi-national enterprises is likely to have a distortionary impact on the market competition and can adversely affect the development of Indian digital enterprise industry, apart from creating strong incentives for Indian enterprises to either locate themselves outside India or sell their businesses to foreign enterprises.

 Recommendations of the Committee

• Equalisation levy may be imposed on digital transactions, by introducing the necessary statutory provisions by a separate chapter in the Finance Act, 2016. This will not be a part of the Income-tax.
• The rate of equalisation levy may be between 6 to 8 percent of the gross sum received.
• The equalisation levy should be chargeable on any sum that is received by a non resident from a resident in India or a permanent establishment in India as a consideration for the specified digital services.
• Services would include:

1. online advertising or any services, rights or use of software for online advertising, including advertising on radio & television,

2. digital advertising space

3. designing, creating, hosting or maintenance of website

4. digital space for website, advertising, e-mails, online computing, blogs, online content, online data or any other online facility

5. any provision, facility or service for uploading, storing or distribution of digital content

6. online collection or processing of data related to online users in India

7. any facility or service for online sale of goods or services or collecting online payments

8. development or maintenance of participative online networks

9. use or right to use or download online music, online movies, online games, online books or online software, without a right to make and distribute any copies thereof

10. online news, online search, online maps or global positioning system applications

11. online software applications accessed or downloaded through internet or telecommunication networks

12. online software computing facility of any kind for any purpose

13. reimbursement of expenses of a nature that are included in any of the above.