31 May 2016 EY Tax Alert Indian Equalization Levy on digital services to be effective from 1 June 2016, administrative rules notified Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. Equalization Levy (EL) was introduced in India in the Union Budget of 2016 and was enacted as part of the Finance Act (FA) 2016. EL is chargeable at the rate of 6% on gross consideration, for specified digital services and facilities, received or receivable by a non-resident (NR) who does not have a Permanent Establishment (PE) in India. The specified payer (being an Indian resident carrying on business or profession or a NR having a PE in India) is under obligation to deduct the EL from the amount paid or payable to the NR service provider. Recently, the Central Board of Direct taxes (CBDT), the apex administrative body for direct taxes in India, notified the effective date of EL provisions as 1 June 2016 as also the Equalisation Levy Rules, 2016 (the EL rules) for its implementation [1]. The EL rules include manner of payment of EL, form for furnishing annual statement of specified service, forms for filing appeal before the appellate authorities. This Tax Alert highlights key aspects of the said notifications. [1] Notification No. 37/2016 & 38/2016: F No. 370142/12/2016-TPL, dated 27 May 2016
Background EL, a newly introduced levy in FA 2016, has the following key features [2] : EL is a levy at the rate of 6% on gross consideration for furnishing specified services, received or receivable by a NR service provider who does not have a PE in India. Specified services means online advertisement, provision for digital advertising space, provision for any facility or service for online advertisements and other services as may be notified. The specified payer (Taxpayer) is under an obligation to deduct EL from the amount paid or payable by it to the NR for specified services. Specified payer is referred to as a resident of India carrying on business/profession or a NR having a PE in India. EL provisions lay down detailed procedural provisions regarding payment of EL by the Taxpayer, reporting requirement in respect of specified services during a tax year, levy of interest/penalty in case of failure. Effective date of EL provisions The provisions of EL shall come into force from 1 June 2016 EL rules EL rules include manner of payment of EL, forms for furnishing annual statement of specified service forms for filing appeal before the appellate authorities. Taxpayer who is required to deduct and pay EL shall pay the amount [3] to Central Government by remitting it to the Reserve Bank of India, any branch of State Bank of India or any authorized bank accompanied by Equalisation Levy Challan. The EL is introduced as a part of selfcontained code under Chapter VIII to FA 2016 and not as a part of Indian Tax Laws (ITL). The provisions are subject to take effect from the date to be notified by the CBDT in India. In view thereof, the CBDT has now notified the effective date of EL as 1 June 2016. It has also notified the EL rules concerning procedural aspects of EL, which also come into force from 1 June 2016. EL is introduced pursuant to a flagship project of Organisation for Economic Co-operation and Development (OECD), i.e. Base Erosion and Profit Shifting (BEPS). In March 2016, the CBDT released a report of the Committee on Taxation of E-Commerce which recommended introduction of EL considering the discussion in OECD s BEPS report on Action 1 on digital economy. [2] For details, refer EY Alert Budget Connect 2016 - Highlights and impact of Indian Union Budget: Equalisation Levy - Fresh selfcontained code on taxation of Digital Ecommerce transactions dated 1 March 2016 [3] Amount payable as EL, interest, penalty, refund due to be rounded off to the nearest multiple of ten rupees
Details of rules are captured in the following table: S. No. Particulars Rule prescribed Forms for reporting Time Limit 1. Furnishing annual statement by the Taxpayer in respect of specified digital services and verification thereof 2. Furnishing of annual statement upon issuance of notice by Tax Authority Rule 5 Form 1 30 June of the immediately succeeding tax year [4] Rule 6 Form 1 Within 30 days from date of receipt of notice 3. Notice of demand Rule 7 Form 2 4. Appeal to First Appellate Authority Rule 8 Form 3 Within 30 days from date of receipt of order imposing penalty 5. Appeal to Tribunal Rule 9 Form 4 Within 60 days from date of receipt of order imposing penalty Illustrative contents of annual statement to be provided by the Taxpayer in Form 1: Name of the Taxpayer, Address, PAN, Tax Year, Jurisdictional range Total amount of consideration for specified paid/credited, EL deductible on specified services, EL deducted, EL paid, interest liability and payment thereof Name of NR providing specified service, address, PAN (if available), amount of consideration for specified service paid/credited, Date of payment or credit of EL, interest, penalty and payment details thereof Authorized persons to file Form 1, 3, 4: In case of individual and HUF, the person authorized to verify the return of income In case of company, Managing Director or Director or Principal Officer In any other case; Principal Officer [4] To be filed electronically under digital signature or through electronic verification code
Comments India has pioneered in introducing EL provisions at global front taking into account the discussions in OECD s BEPS Action 1 on digital economy. The rules are notified just in time to effectuate the EL from 1 June 2016. In terms of the notification, EL shall apply to consideration received or receivable for specified services provided by the NR with no PE in India, on or after 1 June 2016. The obligation to deduct and pay the amount is on the payer (service recipient). Accordingly, the payers who are covered by the EL provisions will need to evaluate the impact of the trigger of EL in respect of their existing and future contracts. Since the failure to deduct and pay EL results in adverse consequences for the payer, the payer will need to factor in the levy after considering the wide scope of EL provisions of the FA 2016.
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