Introduction: The word 'equalization' signifies the purpose to keep tax neutrality between different businesses. Equalization levy is a tax policy implemented to create a 'level playing field' between service providers with and without a permanent establishment in India. This article studies the requirement to improve it further.
Background: Equalization levy is a separate chapter in Finance Bill, 2016 which came into force from June 1, 2016. The rate of tax is 6 per cent on consideration received or receivable for specified services provided by non-residents not having a permanent establishment (PE). It is applicable only if the payment for specified services to non-resident service provider exceeds Rs. 1,00,000 during a financial year. The levy has to be deducted by the recipient of services and to be paid by seventh of the following month. A statement is to be furnished annually in Form no.1.
Issues: Several concerns about the equalization levy.
a) Lack of clarity about its nature - direct or indirect? The equalization levy in the Finance Bill, 2016 is under a separate chapter and hence there is lack of clarity as to whether it is in the nature of income tax, or an indirect tax as it is payable on consideration for services. Whether a tax is to be classified as direct or indirect, it depends on the intention of the taxing authorities on its incidence. It is collected by receiver of service on behalf of service providers. Its intention is to burden the non-residents. But practically, the burden is falling on the receivers as there is no mechanism to collect it from service providers.
b) Double taxation When a foreign company, which does not have a PE in India and supplies such services, and is subject to corporate income tax in its relevant tax jurisdiction is subject to the equalization levy, it will not be able to claim income tax credit for the equalization levy paid and this will result in double taxation.
c) Same tax in two names - GST on OIDAR and Equalization levy Concerns have been raised about the Constitutional validity of the equalization levy. Is it not the same as GST levy on reverse charge basis applicable at a different rate? The services which are taxed are similar in both the taxes? GST and equalization levy are two different taxes. The people who are taxed are also different.
The question is: can there be two different taxes on identical bases though with different rates? Legally, there does not seem to be a problem it is possible that there may be overlaps and a transaction may get taxed under different statutes.
d) Compliance burden Ideally, the responsibility to pay tax and file equalization levy returns should be on the non-resident. However, enforcing these obligations on a non-resident requires a lot of ground work. Best method of ensuring compliance by Non-Residents who have no PE in India would be to ask all banks, credit card companies and payment gateways to deduct equalization levy before making the remittance abroad. However, at present, there is no mechanism under which levy can be deducted by credit card companies from payments made through credit cards. In the circumstances, the only mechanism available to the Government of India is to recover the tax from the Indian resident payer.
e) Incidence of the Equalization levy Although some non-resident online advertising companies have decided to absorb the equalization levy on all cross-border digital transactions and not pass it on to Indian firms advertising on their platform. There are analyses that the levy will not only be passed on but more than passed on through grossing up. It has been said that with the levy outside the Income Tax Act, foreign companies in their home country will not get tax credit for the levy and pass on the entire tax to Indian consumers. Indian companies will have to gross up the fee so that the foreign online company receives the original fee.
Summary: The equalization levy aims to level the playing field between foreign and domestic e-commerce companies. It obviously corrects the unfair advantage that some non-resident companies without PEs enjoy from double non-taxation. Moreover, the system without an equalization levy may even prompt the resident companies in the digital market to become non-resident companies without PEs.
The possible solutions to the glitches of equalization levy-
a) Proper mechanism under which levy can be deducted by credit card companies from payments made through credit cards so that financial burden may be shifted to non-residents clearly.
b) A significant criterion for defining a PE. Its incorporation both in the domestic laws as well as in the treaties.
Disclaimer: This article is provided for information purposes only it could not be considered as legal or financial advice.
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