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India Mulls Tax Challenges Facing Digital Economy

by Mary Swire, Tax-News.com, Hong Kong

23 March 2016


On March 21, 2016, India's Central Board of Direct Taxes released a report which discusses ways to address tax challenges facing the digital economy.

The report, which was prepared by a Committee appointed by the CBDT, was taken into account by the Finance Ministry in preparing the 2016 Finance Bill.

The report is divided into 11 sections. It discusses the current status and growth prospects of the digital economy, and the various tax challenges posed by the digital economy having regard to Action 1 of the base erosion and profit shifting project. The report also examines the issues relating to tax neutrality between domestic and multinational enterprises and their implications; the principles for allocating taxing rights; and the broader tax challenges related to nexus and characterization of income from digital transactions.

The report proposes an equalization levy, which may be charged at a rate between six percent to eight percent of the gross payment made for specified digital services and facilities in respect of payment exceeding INR100,000 (USD1,500) made by a person resident in India or a permanent establishment of a non-resident person to a non-resident enterprise.

The report states: "The BEPS Report on Action 1 clearly highlights the need for modifying existing international taxation rules, and identifies three options, i.e. a new nexus based on significant economic presence, a withholding tax on digital transactions, and equalization levy. The Report elaborates in detail the characteristics of these options and their possible tax design."

The report adds: "After examining the three options identified in the report, the Committee notes that compared to the first two options, i.e. a new nexus based on significant economic presence and the withholding tax on digital transactions, which would require changes in a number of tax treaties, the third option of 'equalization levy' provides a simpler option that can be adopted under domestic laws without needing amendment of a large number of tax treaties."

The report clarifies that "the equalization levy imposed on the payment for digital transactions would not be a tax on income and hence would not be covered by tax treaties. As [the] equalization levy is not proposed as tax on income, it would need to be imposed outside the Income Tax Act."

TAGS: Finance | tax | business | India | tax avoidance | mining | law | enforcement | tax authority | internet | legislation | tax planning | tax rates | withholding tax | tax reform | legislation amendments | trade | services | Tax | BEPS

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