The Centre’s efforts to tax the digital economy is paying rich dividends to the exchequer, going by the ‘equalisation levy’ mop-up for 2017-18.

In 2017-18, the Centre garnered as much as ₹550 crore through the ‘equalisation levy’, official sources said.

India introduced the levy in 2016 on payments made by residents to a non-resident for online advertisement, provision of digital and advertising space or any other facility or service for online advertisement.

SEP route

It is not just ‘equalisation levy’ that augments tax collections. The introduction of taxation based on Significant Economic Process (SEP) will also bolster tax revenues.

This is because SEP will seek to widen the tax base in India by establishing business connection and charging to tax income earned by digital businesses which operate out of jurisdictions with which India has not entered into a double taxation avoidance agreement (DTAA), sources added.

However, where India has already entered into a DTAA, the SEP will only be effective after renegotiation of such DTAA which will be based on international consensus.

Expert take

Sandeep Jhunjhunwala, Director, Nangia Advisors LLP (Andersen Global) said: “The data on tax collection on account of imposition of Equalisation Levy and the reiteration by the Government on introduction of taxation based on SEP comes at a time, when the OECD is striving for a consensus-based long-term solution with respect to addressing tax challenges arising from digitalisation”.

The OECD released a public consultation document on February 13 to get inputs on the possible solutions to the tax challenges of digitalisation. Though India's unilateral approach of introducing SEP tax seems to be getting support from several other developing countries, India and the international communities’ agreement to work multilaterally on this aspect needs to be kept in mind.

“Determination of thresholds and profit attribution are vital aspects which needs to be methodically thought through before any unilateral approach in the form of SEP tax is introduced by the government”, Jhunjhunwala told BusinessLine .

Nexus-based taxation

In 2018, India introduced a nexus-based taxation approach in the domestic tax law, deeming a SEP for non-residents (to which appropriate income would be attributed) in certain scenarios.

The scenarios specified are payments made to a non-resident for goods, services or property, including download of data and software exceeding a prescribed threshold; or soliciting of business activities or interaction with a prescribed number of users using digital means. The relevant thresholds and the number of users are yet to be prescribed by the Indian tax administration.