Many online Advertisement portals are non-resident and do not have permanent establishment in India. Many resident assessee make payment to this non-resident for advertisement and claim as business expenditure u/s 37. Now India is losing its revenue since payer gets the deduction and amount received by payee is not taxable, so Finance Act 2016 w.e.f. 1/6/16 introduced the concept of equalisation levy
Background and Relevance of Equalisation Levy
The inadequacy of physical presence is based on nexus rules that are in place in tax treaties. Also, it includes the flexibility of taxing payments as royalty or fees for technical services creating an ideal tax terrain for dispute.
To clarify this direction, To make this clearer, the government has introduced in Budget 2016 the Equalisation Levy to make one of the suggestions of the BEPS (Base Erosion and Profit Shifting) Action Plan.
In the last 10 years, IT has gone through an explosive growth phase in India and worldwide.
In turn, this has resulted in a variety of new business models, in which the majority of businesses rely on telecommunications and digital systems.
This has increased the supply and demand for digital services.
To clarify the situation in this area, the government announced in the Budget 2016 the equalisation tax.
Many companies that provide services online have their own country of registration where tax rates are very low. They also pay very little tax on their worldwide income.
The Main Features of This Levy on Equalisation Are as Follows
The Equalisation Levy was introduced in Finance Bill 2016 in Union Budget 2016-17. Here are its characteristics of it:
It is taxed to the digital commerce transaction conducted without regard for national borders.
Specific services refer to online advertisements and any digital advertising or any other facility/service used for online advertising.
The Equalisation Levy is 6% of the value of the consideration paid for specific services received or owed from a non-resident who does not have the permanence of a permanent establishment (‘PE’) in India or from a resident of India who is engaged in the profession or business, or from a non-resident who has a permanent establishment in India.
There is no levy if the total amount of consideration is not more than ₹1 lakh during any prior year.
Applicability of Equalisation Levy
Equalisation Levy is a tax directly which is withheld by the person who receives the service while paying it. It applies to an Indian resident who is engaged in any profession or business or who has a permanent business in India or if:
The money has been paid to a non-resident service company.
A service provider’s total annual remittances are greater than ₹1 lakh for a single financial year.
It will be inapplicable in the following situations:
The non-resident service provider concerned has a permanent office in India. Also, the requested service is linked to that permanent establishment.
The total amount of the consideration to be paid for the specific service received or payable is less than ₹1 lakh.
The service described is not intended to be used to pursue work or profession
3. Roll back provisions in case of merger and demerger
“roll back” provisions refers to the applicability of the methodology of determination of ALP, or the ALP, to be applied to the international transactions which had already been entered into in a period prior to the period covered under an APA. However, the “roll back” relief is provided on case to case basis subject to certain conditions.
Therefore, it is proposed to amend the Act to provide roll back mechanism in the APA scheme. The APA may, subject to such prescribed conditions, procedure and manner, provide for determining the arm’s length price or for specifying the manner in which arm’s length price is to be determined in relation to an international transaction entered into by a person during any period not exceeding four previous years preceding the first of the previous years for which the advance pricing agreement applies in respect of the international transaction to be undertaken in future.
The agreement is between the Board and a person. The principle to be followed in case of merger and demerger is that the person (company) who makes the advance pricing agreement(APA) application or enters into APA would only be entitled for the rollback provision in respect of international transactions undertaken by it in the rollback years. Other person (conpanies) who have merged with this person (company) would not be eligible for the rollback provisions.
Example of merger
if A,B and C merge to form C and C is the APA applicant , then the agreement can only be entered into with C and only C would be eligible for the rollback provisions. And if A and B merge to form a new company C and C is the APA applicant , then nobody would be eligible for rollback provisions
Example of demerger
If A has entered into APA and subsequently demerges into A and B , then only A will be eligible for rollback for international transaction covered under APA. As B was not in existence in rollback years, availing of rollback to B does not arise
