It”;s a bird! It”;s a plane! It”;s Superman! Well, in the tax landscape, determining the exact nature of the equalisation levy (EL) isn”;t proving to be that easy. Is it part of the Income-Tax (I-T) Act, which could enable the nonresident entity to claim a tax credit in its home country? Or is it an indirect tax? Or, perhaps a form of turnover tax? The debate continues. Meanwhile, this levy has been grabbing headlines. As Mastercard had permanent establishments (place of business) in India, which were paying their due tax on business income, the Delhi High Court held that it could not be expected to pay another tax –; EL. Some internet giants reportedly skipped the first scheduled payment due on July 7, primarily owing to lack of clarity on various fronts. EL”;s scope was expanded by the Finance Act, 2000, to cover non-resident ecommerce operators. They would have to pay tax at 2% on the consideration received for online sales of goods or services. It covered both B2B and B2C transactions, but did not apply where the sales, turnover or gross receipts of the non-resident entity were less than `2 crore in a fiscal year. Is the objective of this levy to cover only digitalised products or services? Or will it even include physical goods and services, where ecommerce operators merely facilitate placement of orders and, in some cases, its delivery? Will EL be charged only on the income (e.g., facilitation fees) of the ecommerce operator, or on the gross value of the goods or services? Apart from lack of clarity on these basic issues, a plethora of complexities arise owing to the interplay of tax provisions (only one of which has been dealt with by the Delhi High Court). For instance, if the transaction is subject to EL, then it should not be subject to a withholding tax in India, because it can also be construed as payment for royalty or fees for technical services. India”;s unilateral move has come in for investigation by US authorities, who have already actioned against France, by way of higher tariffs on imports. To enable a global consensus, under the Pillar 1 initiative spearheaded by the Organisation for Economic Cooperation and Development (OECD), its secretariat last November proposed a “;unified approach”; and released a broad framework of proposed rules for further discussions. The proposed rules would determine where the taxes would be paid (nexus rule) by large MNCs engaged in consumer-facing business and profit allocation rules. As only residual profits (criteria to be discussed) are proposed to be allocated to countries where customers reside, it was expected that India would negotiate harder for a wider profit allocation framework. Recently, the UN Committee of Experts on International Cooperation in Tax Matters agreed to address digital taxation by amending the UN Model Treaty and incorporating a new article. Rajat Bansal, ministry of finance officer and a member of a UN expert subcommittee, submitted a paper (bit.ly/3jx4L18, Appendix 2) in his personal capacity, which promises abetter deal to developing countries and more simplicity to taxpayers. The proposed new article is a follow-up on Bansal”;s paper by a group of UN Tax Committee members from developing countries. Here, nexus will be determined based on local revenues alone, and global thresholds will not count for determining whether or not an MNC should be covered by the proposed norms. Second, it is not merely the residual profits that would be allocated to those countries where the customer base is. But a withholding tax mechanism, coupled with an alternative net basis fractional approach –; a percentage of local sales to global sales –; would determine profit allocations. The in-scope activities to be covered by the proposed norms would be the same as envisaged by OECD”;s initiative –; automated digital services, including online search engines, intermediation platforms, advertising services and gaming, social media platforms, digital streaming and cloud computing. Bansal”;s paper suggests an approach similar to the multilateral agreement be adopted, and the new article would amend all treaties of signatory countries. Elimination of double taxation would continue under the tax treaty provisions. The draft article currently underway is likely to incorporate suggestions received from the subcommittee members, which will be further discussed towards end-October. Aglobal consensus –; rather than a unilateral approach, which in the case of India, has left stakeholders grappling for answers –; is the best way forward. At best, unilateral approaches should be treated as temporary, and the domestic provisions dropped once internationally accepted norms are in place.
Read more: economictimes.indiatimes.com