INTERNATIONAL TAX - Equalisation Levy - Budget 2016

[CS Swati Dodhi]

In order to address the challenges posed by the new digital economy and the rapidly evolving nature of its transactions, 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 a permanent establishment in India, from a resident in India who carries out business or profession, or from a non-resident having permanent establishment in India.

Further, in order to reduce burden of small players in the digital domain, it is also provided that no such levy shall be made if the aggregate amount of consideration for specified services received or receivable by a non- resident from a person resident in India or from a non-resident having a permanent establishment in India does not exceed ₹ 1,00,000 in any previous year.

Online advertising expenditure in India have risen on account of greater digitalization and increased use of the web as a most reliable advertising medium.

To provide certainty and to avoid interpretational issues, it is also proposed to define certain terms and expressions used therein. Further it also proposes to provide for the procedure to be adopted for collection and recovery of equalisation levy. In order to provide for the administrative mechanism of the equalisation levy, it also proposes to provide for statutory authorities and also prescribes the duties and powers of the authorities to administer the equalisation levy. In order to ensure effective compliance, it also proposes to provide for interest; penalty and prosecution in case of defaults with sufficient safeguards. Further, it also proposes to confer the power on the Central Government to make rules for the purposes of carrying out the provisions of this Chapter and further provides that every rule made under this Chapter shall be laid before each House of Parliament.

This levy would need to be collected by the person making the payment, much like withholding tax and paid similarly into the government’s account on a monthly basis, provided the sum being paid to the non resident exceeds or is going to exceed ₹ 1,00,000 in the relevant financial year.

Interest at 1% per month and penalties on non-deduction to the tune of the amount of levy have been proposed in the finance bill to keep people in charge of making such payments honest. Further, it has been proposed to amend certain sections (Section 40 of the act) to allow the expenses on which such equalization levy is impose-able as deduction only in the year in which such levy has been paid to the government.

To make rules easier for the foreign providers who will have to bear the pain of this levy, an amendment has been made in Section 10 of the act to ensure that the incomes on which such equalization levy has been deducted and paid shall be considered exempt in India. The drafting of the exemption would make it appear that the total income (including the levy) are therefore exempt, in this case the levy should be recoverable by the non-resident by filing a simple return of Income.

Rationalization of tax deduction at source provisions relating to payments by AIFs to investors

Currently, Category I and II AIFs are required to deduct tax at source at the rate of 10% at the time of credit or payment of any income (other than business income) to
investors.

As proposed to amend the provisions of section 194LBB of the Income tax Act to provide for the following rates for deduction of tax at source

• 10% where the payee is resident.
• Rates in force (rate under the Income tax Act or rate under the applicable DTAA, whichever is beneficial), where the payee is a non - resident or a foreign company.
• The facility for the investors to obtain certificate for deduction of tax at a lower/ NIL rate would be available.

It is further proposed to provide that the expenses incurred by the assessee towards specified services chargeable under this Chapter shall not be allowed as deduction in case of failure of the assessee to deduct and deposit the equalisation levy to the credit of Central government.