Why Budget proposal on digital tax may land in court

While the levy utilized solely to digital promoting providers until final yr, Budget widened the scope to impose a 2% tax on international e-commerce gamers.

The central authorities’s clarification on the two per cent equalisation levy on international digital operators in the Budget, which significantly expands the scope of the levy, is perhaps challenged in court, with a number of firms considering submitting a writ petition in the approaching few weeks.

The writs is perhaps filed on the grounds of the levy’s alleged extra-territorial overreach, because it goals to cowl these entities that should not have a bodily presence in India, going towards worldwide taxation guidelines.


Besides, it may also be challenged underneath the bilateral tax treaties as it’s being seen as “a disguised form of Income tax, designed to circumvent India’s obligations under the tax treaties”.

While the levy utilized solely to digital promoting providers until final yr on the charge of six per cent, the federal government widened the scope to impose a two per cent tax on non-resident e-commerce gamers with a turnover of Rs 2 crore from April 1.

“Several firms are considering submitting a writ petition towards the equalisation levy clarifications in the Budget.

“Deliberations are going on, given the massive hit it’ll have on earnings of not simply international gamers, however their Indian companions and subsidiaries.

“The clarification has left a number of firms in a repair as they may now fall underneath the ambit of the tax due to the way in which it has been drafted, despite the fact that that may not be the intent of the federal government,” stated a senior tax guide.

According to the clarification, if a transaction is undertaken on-line utilizing an Indian IP deal with, it may fall underneath the levy’s ambit.

However, this may be challenged as each sellers in addition to final shoppers of products or providers may reside exterior India and there may be no connection of such transaction to India.

“Thus, neither the ‘residential status of buyer’ nor the ‘use of Indian IP address’ is a reasonable way to fasten the equalisation levy,” stated a lawyer, talking on the situation of anonymity.

“This is definitely going to create a fear for taxpayers as there have been many open points that weren’t addressed and new adjustments have expanded its scope.

“Payment gateways, software program firms, tech giants, e-commerce operators and even an individual promoting any good on these platforms falls underneath the purview of EL now,” stated Amit Maheshwari, companion, AKM Global.

However, a senior tax official stated the federal government’s intent was at all times to tax these transactions proper from the time it was launched from April 1, 2020.

However, the federal government would possibly contemplate providing some aid on curiosity on late fee as a number of firms would possibly now realise that they may come underneath the ambit of the levy.

Late fee attracts curiosity of 1 per cent per thirty days, and penal penalties as much as the worth of the levy might be imposed.

“It has been clear from the start that any exercise that’s carried out on-line could be coated underneath equalisation levy.

“If you say that each one 100 per cent actions should be on-line, meaning, I’m going on-line, I e book on-line, I choose a product on-line, I order on-line and the product can be delivered on-line, it’ll make the scope of the levy very, very slim, which was by no means the intention of the federal government.

“And this intention has now been made clear,” stated a senior official on the Central Board of Direct Taxes.

“If there are grievances that payments in those two quarters have already passed, and now non-resident will have to make payment for the previous quarters, then whether interest is to be levied or waived… that power under Section 119 of the Income Tax Act can be exercised,” he defined.

On the levy being imposed on the complete gross sales consideration and never the fee half, the official stated: “It was the interpretation of taxpayers that the levy will be imposed on the commission part and not the department’s intent.”

The equalisation levy mop up posted a sturdy 64 per cent progress after the deadline for the third installment on January 7.

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