6% Equalization Levy On Specified Services Provided By The NRIs

Under the section 165 of the Income Tax Act, 1961, an equalization levy of 6% on specified services provided by a non- resident to:

– Resident person is carrying on the business and profession

– Non-resident having a permanent establishment in India

Presently the digital advertising services are revealed. The procedural aspects of this levy are similar to the withholding tax i.e. the liability of collection and the payment of equalization levy is on the recipient of on line advertisement services.

Why do we require a completely new levy on this category of services?

The fact is that the traditional taxation and Double Tax Avoidance Agreements (DTAA) provisions are inadequate to make sure that the actual amounts of taxes are collected on the overseas digital transactions. The current DTAA provisions, allow the source country to tax on the profits earned by the business only when a permanent establishment is present in the source country. With the improvement in the communication technology, it is possible to have an economic presence in the other country without having any fixed place of business in that particular country. Hence, the digital services go untaxed in the source country. Creative structuring of the business processes among the different group entities can make sure that most profits are recorded in a country with no or very low income tax. In such cases the profits on the digital transactions rescue the taxation completely.

Equalization levy is one measure to pledge that digital services are taxed and the source country gets its rightful share of tax. But the next question arises is, is it a good measure?

Equalization levy is simple to understand and implement. Thus, the chances of dispute will be less. It will be efficient from the aspect of tax collection at India.

Arguments against the Equalization Levy:

1. Double Taxation: Equalization levy is a new levy and probably stated to be different from the corporate income tax. In a scheme where the service provider is paying the actual tax on the profits earned by the business, this levy will be like additional tax on the same income. From another prospective, the equalization levy implies to be a measure to reverse the DTAA provisions.

2. Discrimination: Equalization levy is taxed on the gross basis. This levy is established only on the non- resident service providers while the resident online service providers will be liable to the corporate income tax on the net profits. One may argue that, Government is discriminating between the resident advertisers and the non- resident service providers. The existing DTAA provisions (Article 26) does not support any such discrimination.

The most appropriate point is will equalization levy be considered as another form income tax?

The DTAA states that the convention administers in the Indian Income Tax and surcharge thereon. But, it also further contributes the convention which can also administer to the new taxes which are by nature similar to the income tax. So, it requires to be examined whether the equalization levy will be regarded as a new and another form of income tax. In India, the service tax on the reversal charges which is based on the online advertising services. Equalization levy was proposed to get the overseas digital services in the net of direct taxation. Thus, equalization levy has high possible to qualify as tax which can be covered by the Article 2 of DTAA.

If we consider that the DTAA provisions will administer to Equalization levy, the provisions of tax credit to avoid the double taxation will administer. Also, one can use Article 26, Non Discrimination, and argue that this levy is none authorized.

If the equalization levy is not covered by the DTAA provisions then it can give rise to double taxation. Many overseas digital service providers may not accept the deduction for this levy since they will not get the credit and finally the resident business will have to dense their payments, which will increase the cost of services.

Equalization levy is discussed in the report that on the Action Plan for Taxation of Digital Economy which has not been recommended any kind of measure.

Equalization levy may be fast and easy way to tax the digital transactions but is prone to various other complications and thus may not be the perfect solution from a long term prospective.

Tax Assist is a professional income tax consultancy in India for both corporate houses and individual tax payers; the latter comprising Salaried Individuals, Seafarers, Professionals and Non Resident Indians.

With the help of Tax Assist and its team of income tax professionals, taxpayers can minimize their Income Tax liability, maximize their net income and create opportunities to save for current and future needs while maintaining proper accounting standards and income tax returns which are compliant with the Law.