This document discusses India's introduction of an equalization levy on digital advertising services provided by non-residents without a physical presence in India. It provides background on the growth of the digital economy and challenges in taxing multinational enterprises conducting business across borders digitally. The equalization levy aims to address the tax challenges posed by businesses having an economic presence in India through digital means but no physical presence that could be taxed under current rules. It will impose a 6% tax on payments for digital advertising services received by Indian residents or non-residents with an Indian business presence from non-residents without an Indian permanent establishment.

1. Digital Economy: Equalisation Levy
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2. In this era of technology intertwined lifestyle, e-commerce
has become a way of life. E-commerce seemingly facilitates
every other aspect of our lives at a click of a button, whether
its procurement of daily household items or requisitioning of
any particular service. Today, accessibility to the digital world
is not a privilege but a necessity for most people, particularly
in urban areas.
Over the past few decades, the burgeoning development of
the Information and communication technology ('ICT'), its
accessibility and affordability has led to this digital revolution
around the world. ICT has also provided opportunity to
businesses to tap the world markets and bridge the
requirement of physical presence across the globe.
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3. The model of doing business electronically has provided immense growth
opportunities. Digital economy across the world is reflecting a growth rate of
10%1 which is significantly higher than the growth numbers of the global economy as
a whole. Research and studies around the world have indicated that investment in ICT
positively affects the productivity and GDP growth of a country. Developed countries
in terms of ICT development have the highest GDP levels, which indicates that
implementation of ICT in a country improves its overall economic health.
Despite the significance of ICT in overall development of an economy, ICT quotient
has remained low in India. Though, in past few years, India has witnessed some
successful start-ups in this field, development of the concerned infrastructure is
much needed to capitalise on the growth opportunities. Foremost India has to bridge
the urban-rural hiatus in terms of the communication infrastructure. With the NDA
government vision of Digital India, it is expected to embark a digital revolution in
India and to achieve the desired growth rates.
Albeit, this model of conducting business through the realms of cyberspace has led
the enterprises in procurement and selling of goods and services in different
jurisdictions without any physical presence in that country, the same has also led to
severe tax challenges direct as well as indirect. The economic presence in a sovereign
through the world of web has posed direct taxation concerns due to absence of
physical presence in that specific jurisdiction.
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4. The development of the cyber economy has captured the attention of the taxman of the world economies to test their
fundamental Permanent Establishment rules developed for old 'brick and mortar' economies, in the light of the tax challenges
caused by the new digital business models. The digital market has revolutionized traditional ways of conducting business around
the globe, while tax rules have been slow to adapt to this new business environment and could not come up with the possible
solution.
It is widely felt that MNEs have treaded the path of aggressive tax planning thriving upon the interaction of tax laws and treaty
provisions between different sovereigns and have relatively paid low amounts of tax or no tax by artificially shifting profits away
from the economy where they are earned, to a more favourable tax jurisdiction. This has led to a divide between the economic
presence in a country vis-a-vis taxable presence in such jurisdiction.
G202 members have expressed their concern with regard to artificial shifting of profits by the MNEs to the low or no tax
jurisdictions and in response thereto announced a coordinated drive with Organisation for Economic Cooperation and
Development ('OECD') to modernise the current framework of tax treaties and nationally set anti-tax avoidance laws. OECD at the
request of G20 is leading the initiative of development of a strategy to address such profit shifting, through its Base Erosion and
Profit Shifting project ('BEPS'). Since 2012, OECD is working hard to achieve the goal to curb the unwarranted tax practices by
MNEs and has introduced 15 Action Plans in mid 20133 highlighting the necessary areas of concern, action points to address them
and the expected outputs of those actions.
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5. OECD in its BEPS report Action Plan 14 on addressing the tax challenges of the digital economy, has highlighted tax neutrality5 as a
major concern and suggested several options to tackle the direct tax challenges which inter-alia includes amendment in the
Permanent Establishment rules, modifying the definition a PE to address artificial arrangements through certain "conclusion of
contracts" arrangements, amendments in the OECD's transfer pricing guidelines and designing of rules for Controlled Foreign
Corporations ("CFCS") Rule. Apart from the aforesaid the Task Force also considered certain other options inter-alia, a nexus test in
the form of a significant economic presence requirement; a withholding tax on certain types of digital transactions on the
payments made by the resident to the Non-Resident enterprises for the goods and services procured digitally; charging of an
Equalisation Levy to impose equal treatment of foreign and domestic suppliers by taxing the foreign suppliers for their economic
presence in that country, but the same were not recommended by OECD in its final report on tax challenges of the digital economy
under Action Plan 1.
In the midst of this debate of challenges and the recommendations on taxation of the digital economy and majority of the world
economies still considering the options recommended by OECD, India has taken a leap to address the challenges in terms of
taxation of MNEs having a digital economic presence in India without any physical presence.Though, UK and Australia too have
initiated steps to tap the concerns of BEPS by introducing "Diverted Profit Tax" and "Multinational Anti Avoidance Law"
respectively.
The Indian tax proposals announced wide Union Budget 2016-17, suggests introduction of a new Chapter VIII forming part of
Finance Bill separate from the Income Tax Act, 1961 comprising 17 Sections, an Equalisation Levy of 6% on the amount of
consideration for the digital advertising services provided by a non-resident not having a permanent establishment in India to a
resident in India who carries business or profession or to a non-resident having a permanent establishment in India.
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