Many of the commercial transactions on digital platforms such as Google, Yahoo or Amazon may attract a transaction tax if the government accepts the recommendations of a high-level expert panel on e-commerce taxation.

With the CBDT-appointed panel report — made public on Monday — also clarifying that the “equalisation levy” would not be a tax on income, the recent debate around the nature of tax has been put to rest.

An eight-member CBDT-appointed committee, which included representatives of industry biggies such as Flipkart and Amazon, had in early February suggested that an “equalisation levy” of 6 per cent be imposed on 13 specified digital transactions.

However, Budget 2016-17 had proposed the 6 per cent “equalisation levy” only on “online advertising” payments to non-resident recipients. Following this move, there was some speculation on the nature of this levy, as the government had introduced a separate chapter in the Finance Bill for the purpose of e-commerce taxation.

What it means

Since it is not an income tax, benefits of international treaties would not apply to foreign recipients and may, therefore, lead to additional costs for Indian payers, say tax experts.

“While some were of the view that it is in the nature of a withholding tax, others called it an indirect tax. The release of the e-commerce taxation committee report is timely and it has put to rest the unwarranted debate,” said Rakesh Nangia, Managing Partner, Nangia & Co.

Since the ‘Equalisation Levy’ is not a tax on income, tax treaties will not be applicable, he said, adding that “tax credit cannot be claimed by the foreign recipient.”

This view is reaffirmed by the fact that the committee ruled out the option of levying a withholding tax, considering that it would not be feasible to amend tax treaties in this regard, Nangia added.

Amit Maheshwari, Partner, Ashok Maheshwary & Associates, a CA firm, said the committee had identified several online services for this levy. However, the Budget had brought this levy only on “online advertisements” and related services. “So we can expect some more services to be brought in the tax net in the future,” Maheshwari told BusinessLine .

One important issue the committee had taken cognizance of was that the deduction by payment gateways and authorised foreign exchange dealers can reduce the obligation of the payers. The committee has suggested the government look into this aspect as well, he said.

Taxing B2C

While the Budget has sought to bring into the tax net only business-to-business (B2B) transactions as regards payment to non-residents by a resident, indications are that the government would, in the coming years, cover even business-to-consumer (B2C) transactions under this levy.

The exponential expansion of the digital economy in India in recent years has created new tax challenges. To address these challenges, the Centre has opted for an “equalisation levy”, although it could have gone ahead with one of the BEPS project recommendation of imposing a final withholding tax on digital goods and services provided by foreign e-commerce providers.

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