New Delhi, April 17, 2017

It's paid by those without a permanent establishment and have an income exceeding Rs 1 lakh a year

The government might put in place a payments gateway platform and tighten the Income-Tax Act to prevent global online companies from passing on the equalisation levy, which is imposed on them, to their clients.

The levy, or the Google tax, is paid by those without a permanent establishment here and have an income exceeding Rs 1 lakh a year.

An equalisation levy of 6% was introduced in June last year to tax only online advertisements, and this affected companies such as Google, Yahoo, Facebook, Twitter and LinkedIn.

The rationale behind the levy is that the companies concerned earn revenues by way of advertisements in India but do not have to pay the income tax in the country. The levy covers only business-to-business (B2B) transactions.

The committee on taxation of e-commerce, under the Central Board of Direct Taxes (CBDT), is exploring options to ensure that the tax is borne by the global internet companies themselves.

The equalisation tax is in the form of withholding tax or tax deducted at source whereby the person or entity paying for digital advertisements is required to deduct the tax at 6% of the payment and deposit it with the government.

An official said these options were at an early stage of deliberations and a call was yet to be taken on them.

The levy yielded around Rs 500 crore in the previous fiscal year but the government might expand its scope by widening the services and increasing the rate.

“We are working out ways to ensure that the tax is not passed on to customers. It is a withholding tax and there are concerns that bigger parties might ask smaller clients to bear the tax. It is a question of bargaining power. We are trying to iron out these issues before expanding the scope of the tax,” said a government official.

“The equalisation levy is a direct tax and is not meant to be passed on. We are working on procedures and formats in such a way that it will not be possible to pass on the tax,” he added.

The government is coming up with a payments gateway platform, under which the tax amount is deducted from the payment before it reaches the recipient. “This will ensure that the person or entity making the payment does not bear the additional burden,” said the official.

The government is considering who will control these payments gateway, how it will be regulated, and who will collect the tax.

The government is also considering tightening some provisions of the Income-Tax Act to ensure that the tax burden is borne by the internet firms only.

“We are exploring both options — tightening the laws and the payments gateway — to plug the gap before we expand the scope,” said another official. Currently the tax amount is kept low so that global internet firms can get used to the idea, according to him.

According to the current norms, in the case of failure to comply with the provisions of the levy, the amount paid for such services won’t be allowed to be claimed as an expense for income-tax purposes.

The e-commerce committee had recommended a levy of 6-8% on 13 broad services including online sales of goods and services; downloading software, songs, movies and books; and online consumption of news.

[The Business Standard]