By Rajiv G. Shah
Advocate
1. Background
The Finance Act,
2016 (FA) in the chapter VIII (comprising clauses 163 to 180)
has introduced a new tax i.e “equalisation levy” on consideration received or
receivable for any specified services.
The article deals with
some of the important provisions of the chapter and the issues arising there
from.
The Government of India
constituted a committee on taxation of E- commerce. The said committee made
proposal for equalisation levy on specified transactions. The Committee took
cognisance of the Report on Action 1 of Base Erosion & Profit Shifting
(BEPS) Project, wherein very significant work has been undertaken for identifying
the tax challenges arising from digital economy, the possible options to
address them and constraints likely to be faced. The Committee also noted that
this report has been accepted by G-20 countries, including India and OECD,
thereby providing a broad consensus view on these issues. The committee
submitted its report in February, 2016 and accepting the proposal contained in
the report, the Government has introduced this chapter.
The committee stated in
its report that “The significant difference, between an ‘Equalisation Levy’
that is proposed to be imposed on gross amount of payments, and the withholding
tax under the Income-tax Act, 1961 would be that under the latter, withholding
tax is only a mechanism of collecting tax, whereas an ‘Equalisation Levy’ on
gross payments would be a final tax.”
As far as
constitutionality of the provision is concerned, the committee expressed the
view that “Equalisation levy on gross amounts of transactions or payments made
for digital services appears to be in accordance with the entries at Serial
Number 92C70 and 9771 of the First List in the Seventh Schedule of the
Constitution of India. The existing precedent in the form of the Service Tax
appears to remove any ambiguities and doubts in this regard. Thus this
committee is of the view that Equalisation Levy as a tax on gross amounts of
transactions, imposed by the Union through a statute made by the
Parliament, would satisfy the test of constitutional validity.”
It is noteworthy to look
at the memorandum explaining the provisions of the Finance bill so as to
understand the rationale for imposition of the levy.
“……..The Organization
for Economic Cooperation and Development (OECD) has recommended, in Base
Erosion and Profit Shifting (BEPS) project under Action Plan 1, to impose a
final withholding tax on certain payments for digital goods or services
provided by a foreign e-commerce provider or imposition of a equalisation
levy on consideration for certain digital transactions received by a
non-resident from a resident or from a non-resident having permanent
establishment in other contracting state.
Considering the
potential of new digital economy and the rapidly evolving nature of business
operations it is found essential to address the challenges in terms of taxation
of such digital transactions as mentioned above. In order to address these
challenges, it is proposed to insert a new Chapter titled “Equalisation
Levy” in the Finance Bill, to provide for an equalisation levy of 6 % of
the amount of consideration for specified services received or receivable by a
non-resident not having permanent establishment (‘PE’) in India, from a
resident in India who carries out business or profession, or from a
non-resident having permanent establishment in India.”
The objective of the
Government is to impose tax on the consideration received by the non-resident.
The rationale is, on the one hand the consideration paid is tax deductible
while computing the income of the payer, the same escapes the source country
taxation, because payee does not have a permanent establishment in India or
otherwise. The equalisation levy is quantified with reference to the
consideration received by the non resident. The equalisation levy is charged at
the rate of 6% on the amount of consideration received or receivable by the non
resident.
2. Scope
of the levy
2.1. Section163
provides that the provisions of the chapter extends to the whole of India,
except Jammu and Kashmir and the same will come into force from the date of its
applicability notified by the Central Government i.e appointed date. The
Government has appointed 1st day of June,2016 as the date on which
Chapter VIII would come into force.
2.2. The
provisions will apply to the consideration received or receivable for specified
services provided on or after the appointed date. By implication, any
consideration received after the appointed date for the services provided
before the appointed date shall be outside the provisions of this chapter. The
provisions of the chapter will not apply to the consideration received or
receivable for the services provided outside the territorial jurisdiction. This
obviously would require determining the place of provision of the services. For
determining the place of provision of services, one may have to look at the
provisions of the service tax act and the rules framed thereunder. Generally,
place of provision of service is the location of the service receiver.
3. Important
Definitions
Section 164 defines
various terms used in the chapter. It also provides that any words and
expressions which is used in the chapter but not defined in the chapter will
have the same meanings as it has under the Income tax act (ITA) or the rules
there under if the same have been defined there under. Some of the important
terms defined in the chapter are:
i) “equalisation
levy” means the tax leviable on consideration received or receivable for any
specified service under the provisions of this Chapter; It may be noted that though the word levy is
used in the nomenclature, it is clearly a tax.
ii) “specified
service” means online advertisement, any provision for digital advertising
space or any other facility or service for the purpose of online advertisement
and includes any other service as may be notified by the Central Government in
this behalf. The committee on E-commerce has recommended more services to be
subject to equalisation levy and the Government has accordingly retained the
power to notify more services as specified services.
iii) “online”
means a facility or service or right or benefit or access that is obtained
through the internet or any other form of digital or telecommunication network;
iv) “permanent
establishment” includes a fixed place of business through which the business of
the enterprise is wholly or partly carried on. The definition is an inclusive
definition and is on the same line as is in section 92F(iiia) of the ITA.
4. Charge
of levy
4.1. Section
165 deals with the charge of the equalization levy. It provides that the
equalisation levy @6% be charged on the amount of consideration received or
receivable for providing specified services. The other conditions are:
a) The
service provider has to be non-resident and
b) It
should receive consideration for the services from
i) a
person resident in India who is carrying on business or profession or
ii) a non resident having a permanent
establishment (PE) in India (hereinafter referred to as ‘specified persons’ or
‘assessee’).
4.2. It
also provides for the cases when the equalisation levy will not be charged.
They are:
i) when
the non resident who is providing the specified services has a permanent
establishment in India and such services are effectively connected to the said
permanent establishment i.e when the non-resident offers the income from the
specified services as a part of its PE profit.
ii) when
the aggregate amount of consideration received or receivable for the specified
services from each of the specified persons in a previous year is INR one lakh
or less.
iii) when
the specified persons makes the payment towards specified services not for the
purposes of carrying on its business or profession. In such a case even if the
payment exceeds INR one lakh, the same will not be subject to equalisation levy
since the same is not claimed as deduction for the purposes of computing the
taxable income of the specified persons.
It is pertinent to note
that as per the Article 7 of any double taxation avoidance agreement (DTAA),
non residents are taxable in their country of residence as far as the taxation
of the business profits is concerned. They can be taxed in the source country
only if they carry on business in the source country through a permanent
establishment and in such case also only
to the extent of the income attributable to the permanent establishment. Equalisation
levy is sought to be imposed on the business income of the non resident when
the non resident has no PE in India. Hence, to that extent the tax is not
consistent with the provisions of the DTAA. However, it may be noted that the
scope of the DTAA is confined only to the taxes covered under Article 2. Since
this is a new tax, none of the existing DTAA would have covered the same.
However, a question may arise that whether equalisation levy be regarded as an
identical or similar tax to the existing taxes covered by the Article 2? Most DTAA
provides to include similar taxes imposed subsequently to be included within
the scope of Article 2 subject to certain conditions. Hence, if the answer to
the question is yes, then imposition of equalisation levy on the business
profits of the non resident when it has no PE in India may not be regarded as
compatible with Article 7 of the DTAA. The current imposition presupposes that
it is not.. The stand of the Government appears to be that it is not a tax on
the income (and hence, it it has been kept outside the ITA and imposed by the
Finance Act) and therefore there is no inconsistency between the treaty
provisions and the imposition of equalisation levy.
5. Collection
and Recovery
5.1. Section
166 provides for the collection and recovery of the equalisation levy. It
designates the specified persons as assessee and cast an obligation on them to
deduct the amount of equalisation levy from the amount of consideration paid or
payable to the non resident towards the provision of the specified services.
5.2. There
is no obligation to deduct the levy from the consideration if the aggregate
amount payable to a non resident in a previous year is INR one lakh or less.
The wording seems to suggest that the limit of one lakh rupees is qua
each non resident. The assessee has to pay levy so deducted during a month to
the credit of the Central Government by the 7th of the next calendar
month. Delay in the payment would be visited with the simple interest @ 1% per
month or part thereof. In addition to the interest, the assessee would be
liable to a penalty of INR 1000 per day of delay. However, it is provided that
such penalty should not exceed the amount of the levy.
5.3. The
liability to pay the levy would be there irrespective of the fact whether the
assessee has deducted the same from the payment made to the non resident. When
the assessee fails to deduct the levy, in addition to the interest, penalty
equivalent to the amount of levy is imposable on the assessee. In such a case a
question would arise as to whether the levy so paid will increase the cost of
the services availed or it will appear as a separate item in the books of
accounts. In both the cases, in my view the amount should be deductible while
computing the income of the assessee.
5.4. The
possible three scenarios which can arise in view of the above provision is
illustrated by the respective accounting entries:
a. Assessee
makes payment of Rs. 100 towards specified services to X and deduct tax there
from:
Specified Services A/c. Dr. 100
To X 100
X A/c Dr.
100
To Bank 94
To Equalisation Levy 06
Equalisation Levy
Dr. 6
To Bank 6
b. Assessee has as a
part of agreement agreed to bear the equalisation levy
Specified Services A/c. Dr. 106.38
To X 106.38
X A/c Dr.
106.38
To
Bank 100
To
Equalisation Levy 06.38
Equalisation Levy
Dr. 6.38
To Bank 6.38
(In both the above cases, the payment of
Equalisation levy by the assessee would be regarded as deducted from the
payment made to X)
c. Assessee
fails to deduct but makes the payment of the levy as envisaged u/s. 166(3)
Specified Services A/c. Dr. 100
To X 100
X A/c Dr.
100
To
Bank 100
Equalisation Levy
Dr. 6
To Bank 6
Would the 3rd scenario survive? The act has
envisaged the same. In this case the assessee may save the tax of 0.38 but he
will be exposed to the penalty equivalent to the amount of equalisation levy
u/s. 171. However, it may be noted that penalty is discretionary and may not be
levied in appropriate cases.
5.5. As
noted above, the levy is not chargeable when the non resident providing the
service has a PE in India and the specified service is effectively connected to
such PE. The assessee is either a person resident in India or a PE of a non
resident in India. The assessee before deducting the levy will have to ensure
that the non resident providing the service has no PE in India and even if it
has a PE in India, the said service is not effectively connected to the said
PE. They may have to possibly depend on the declaration from the non -resident
in this respect.
5.6. Whether
a non-resident has a PE in the source country or not is generally a contentious
issue and it is very rare that the taxpayer and the tax authorities would agree
at the initial stage. If it is ultimately found or held that the levy was not
chargeable, can the refund be granted to the assessee? There are provisions in
the chapter for grant of the refund to the assesse on processing the statement
furnished by the assessee. Such a case may not be covered by the said refund
provision and also because there are limitations of the time to grant refund
under such cases. Can the refund be claimed on the ground that the levy is
without any authority of law and hence the limitation should not apply?
6. Procedure
and Penalties
6.1. Section
167 imposes an obligation on every assessee to furnish a statement in the
prescribed format in respect of all specified services during the financial
year. The government has notified Equalisation Levy Rules, 2016 and prescribed
Form No. 1 as the prescribed form of the statement. The rules provide that the
said form should be furnished annually on or before 30th June in
respect of the preceding financial year. The form should give information in
respect of all the specified services chargeable to equalisation levy during
the financial year.
6.2. The
assessee would be entitled to revise the statement if he notices any errors or
omissions at any time within two years from the end of the financial year in
which the specified service was provided. He may also furnish the statement in
the aforesaid period if he has not furnished the statement within the
prescribed time.
6.3. The
Assessing officer may serve a notice on any assessee to furnish the statement
if he has not furnished the same within thirty days from the date of service of
the notice. However, the section does not provide any time limit within which
the AO may serve the said notice. On a harmonious reading of the provisions,
one may take a view that the said notice has to be served within the aforesaid
period of two years. What is the basis on which the AO can issue such notice
has not been provided. What are the rights available to the assesse when he
receives the notice, can he challenge the issue of the notice by the AO? Section 172 provides that an assessee who
fails to furnish the statement within the time prescribed under the rules or
the time prescribed by the AO in his notice, would be liable to pay a penalty
of INR 100 for each day of failure.
6.4. The AO, before imposing any penalty under the
chapter has to give the assessee an opportunity to advance his case as to why
the penalty should not be imposed. If the assessee proves that that there was a
reasonable cause for the failure and the AO is satisfied about the same, AO
should not impose any penalty. The order imposing the penalty has been made
appealable to CIT(A) and the order of CIT(A)
has been made appealable to the Tribunal. Provision of section 249 to 251 and section
253 to 255 of the ITA has been made applicable to such appeals. Section 178 of
the FA, 2016 list down various other sections of the ITA which would apply in
relation to equalisation levy as they apply in relation to income tax.
6.5. Section
168 provides for the processing of the statement and issue of intimation to the
assessee after carrying out adjustment in respect of arithmetical accuracy and
computation of interest. The intimation is required to be sent within one year
from the end of the financial year in which the prescribed statement under
clause 167 is furnished.
6.6. Section
169 empowers the AO to rectify the intimation for any mistake apparent from
record and provides that the intimation be amended within one year from the end
of the financial year in which the same was issued. The AO may rectify the
mistake on his own or on the same being brought to his notice by the assessee.
Any rectification which has the effect of increasing the liability of the
assessee or reducing the refund entitlement to the assessee, be made only by
making an order and after giving the assessee a show cause to that effect and a
reasonable opportunity of being heard. If in consequence of any order, any
amount is payable by the assessee, the rules provides the AO to serve a notice
of demand in form no.2 specifying the amount payable by the assessee. The
chapter is silent about the appellability of this order. Under the rules, it is
provided that the intimation u/s. 168 is deemed to be notice of demand. If the
intimation is deemed as notice of demand under the ITA and the same is in
consequence of an order, then the appeal provisions under the ITA should also
follow.
7. Consideration
to be exempt from tax in the hands of non resident
7.1. A new
clause (50) has been introduced in section 10 of the Income-tax act, whereby
any income arising from specified services which is chargeable to equalisation
levy under chapter VIII of the FA 2016 is exempt from the charge to the income
tax. The said clause is reproduced hereunder for ready reference:
‘(50) any
income arising from any specified service provided on or after the date on
which the provisions of Chapter VIII of the Finance Act, 2016 comes into force
and chargeable to equalisation levy under that Chapter.
Explanation.—For the purposes of this clause,
“specified service” shall have the meaning assigned to it in clause (i) of
section 164 of Chapter VIII of the Finance Act, 2016.’
7.2. In
other words income of the non resident from provision of the specified services
to the assessee under chapter VIII of the Finance Act, 2016 is exempt from
income tax in the hands of the non resident if the same is chargeable to
equalisation levy. However, it does not mean that the income of the non
resident from the specified services would be charged to income tax if the same
is not chargeable to equalisation levy for any reason. The charge to income tax
has to be independently established under the ITA.
8. Disallowance
of payment in the hands of payer
8.1. A new
clause (ib) has been introduced in section 40 of the Income-tax act with effect
from 1st June,2016. Section 40 provides for the cases when the
amount is not permitted to be deducted from computing the income under the head
“profits and gains of business or profession” or permitted to be deducted
subject to certain conditions. The said clause is reproduced hereunder for
ready reference:
“(ib)
any consideration paid or payable to a non-resident for a specified service on
which equalisation levy is deductible under the provisions of Chapter VIII of
the Finance Act, 2016, and such levy has not been deducted or after deduction,
has not been paid on or before the due date specified in sub-section (1) of
section 139:
Provided
that where in respect of any such consideration, the equalisation levy has been
deducted in any subsequent year or has been deducted during the previous year
but paid after the due date specified in sub-section (1) of section 139, such
sum shall be allowed as a deduction in computing the income of the previous
year in which such levy has been paid;”.
8.2. In
this respect, the following may be noted:
a) Chapter
VIII of the FA 2016 provides for due dates of payment of the equalisation levy
and consequence of the delayed payment. For the purpose of section 40(ib) of
the ITA, the same is irrelevant. The relevant date for the same will be the due
date of furnishing the return of income u/s. 139 of the ITA.
b) Section
166(3) of the Finance Act envisages a situation when the assessee fails to
deduct the levy from the amount paid or payable to a non resident. As per the
said section, the assesse e is liable to pay the levy even if he has not
deducted the same from the payment. Section 40(ib) of the ITA envisages
situation of deduction of the levy and payment thereof thereafter. Can a view
be taken that cases u/s. 166(3) of the FA are not covered by section 40(ib) of
the ITA? Whether in such a case, provision of section 43B of the ITA would be
applicable and the compliance thereof would be necessary?.
c) What will
be the impact of non discrimination article of the relevant double tax
avoidance agreement (DTAA) on section 40(ib) of the ITA? Relevant extract of
article 24(4) of the OECD and UN model convention (both are identical) is
reproduced hereunder for ready reference:
24(4) Except where the provisions of paragraph 1
of Article 9, paragraph 6 of Article 11 or paragraph 4 of Article 12, apply,
interest, royalties and other disbursements paid by an enterprise of a
Contracting State to a resident of the other Contracting State shall, for the
purpose of determining the taxable profits of such enterprise, be deductible
under the same conditions as if they had been paid to a resident of the
first-mentioned State…..
Section 40(ib) disallowance is applicable in
respect of consideration paid or payable to non-resident for specified services
and not to the resident. Hence, prima facie, the assessee can invoke the
said article of the relevant DTAA. Article 24(6) provides that the provisions
of non discrimination article will not be restricted to the taxes covered under
article 2 and the same extends its applicability to taxes of every kind and
description. In view of this, equalisation levy would be covered by the
non-discrimination article notwithstanding what is the scope of article 2. The
question that may still survive is whether payment towards specified services
would be covered within the words “other disbursements” appearing in article 24(4)?
It may be noted that any consideration received
or receivable by a resident from the provision of the specified services to the
assessee is not subject to equalisation levy and hence, there is no question of
any deduction from the payment and consequential disallowance. In fact, to this
extent there is discrimination. However, the existing provision of Article 24
does not specifically recognise such discrimination. Can revenue argue that the
payment to resident is not subject any equalisation levy at all and hence,
there is no discrimination within the meaning of Article 24(4)?
9. Challenges
9.1. A
question that arises is whether it is a tax on the income of the non resident?
According to the Government, it is not a tax on the income of the non resident.
In fact the income of the non resident which is subject to the levy is
specifically made exempt from income tax. By exempting the income under the ITA
which is subject to equalisation levy, whether the Government has weaken its
case that it is not a tax on income or a tax akin to tax on income?
9.2. Who is
the person chargeable to tax? Under the FA, the assessee is the person making
payment towards the specified services and claiming the said payment as
expenditure while computing its taxable income. Whether he is charged to tax or
it is the non resident?
9.3. In tax
jurisprudence, it is well settled that following four factors are essential
ingredients to a taxing statute:-
a. subject
of tax;
b. person
liable to pay the tax;
c. rate at
which tax is to be paid, and
d. measure
or value on which the rate is to be applied.
9.4. From
the analysis of the provisions of the chapter, it is clear that the subject of
tax is the specified services. From the harmonious reading of the section 165
and 166, it appears that the person liable to pay tax is non resident, but the
collection and the recovery is made from the persons paying the considerations
towards the specified services by way of deduction and they are being regarded
as assessee. It is interesting to note that the non resident receiving the
consideration has no obligation whatsoever under the chapter. What is the
difference between a person charged to tax and a person liable to pay tax? Can
a person who is charged to tax be not liable to tax? Can not the person who is
liable to tax and who is also regarded as assessee, should be considered as the
person charged to tax? Is it that in the scheme of equalisation levy, these questions
does not matter? These questions pose a significant challenge to the new tax. _
