ASSOCHAM and BMR Legal Unveil report on “Equalisation Levy 2.0: India’s Digital Services Tax in the Making” calling for deferral of the levy

New Delhi: The Associated Chambers of Commerce and Industry of India (ASSOCHAM), India’s leading and apex trade association, in association with BMR Legal released their report, “Equalisation Levy 2.0: India’s Digital Services Tax in the making”, in a webinar attended by government officials, tax experts and economists today.

The report estimates that the concerns surrounding the 2020 levy is not just theoretical or one-sided, but the law indeed has a far-reaching impact which necessitates its review. Emphasizing the need for stakeholder consultations and a wholesome impact assessment, including considerations arising on account of Covid-19, steering impact on consumers of digital economy, especially the Indian SMEs, the report recommends a deferral of the 2020 Levy accompanied by a thorough assessment of the law and available policy-choices.

Renowned tax expert, Mr Mukesh Butani, partner at BMR Legal, unveiled the report, and observed the numerous issues that required immediate reconciliation of the levy, including undefined and vague concepts in its wording which causes disputes.

He illustrated the difficulties in use of several terms including establishing ‘consideration’ received by an e-commerce player while determining the scope and the multiple technological challenges in locating IP addresses in India and how the Digital India’s impetus of the Government of India was at odds with the levy.

According to Mr Butani, the 2020 levy does not differentiate between the types of digital suppliers, an important facet of global Digital Service tax imposition pursued by select jurisdictions as part of unilateral measures. There is no difference between someone using cloud computing or online shopping services and to club both services is i logical. Similarly, a supplier and a facilitator of supply are taxed at a similar rate. This will have an immediate impact on the cost which impacts the consumers,” he said.

He added that the levy would increase the cost of consumption of digital services. “The 2020 levy would be dis-incentivizing the domestic service provider. It would have an impact on the outreach of Indian entrepreneurs who rely on digital technology to reach out to consumers,” he said.

The 90-page report undertakes a comprehensive analysis of the impact of the levy on Indian consumers and digital service providers, while also examining the contours of the levy and the implementation challenges it poses. It suggests that the levy would cause spill-over effects on Indian businesses, SMEs and consumers who make use of the products and services provided by non-resident e-commerce entities. It also notes that the increased consumption cost could, in turn, create an affordability barrier to adopt technology, impacting recovery of the economy pursuant to the COVID-19 health crisis.

Former CBDT member, Mr Akhilesh Ranjan accepting that it’s an imperfect tax, it meets the standards of neutrality & efficiency and noted that due to the Coronavirus crises, things are bad on the revenue front. “The government needs revenue to tackle the situation and expanding the scope of levy seems to be the only option. Ecommerce is one such sector that seems to be doing well, hence the government has taken the decision to impose the 2020 Equalisation Levy on it,” he said.

He said that the law was implemented considering the need of the hour in this situation. “There were issues of not being able to tax the not-so-physically-present incomes, this law will help tax such companies and the government will be able to generate more revenue with it,” he said.

Mr Ranjan explained that there are a whole lot of issues that are not clear. “There is a need to have a deliberation with the industry players. There are many points which need clarification as it is causing concerns among the stakeholders. It not only talks about the tax system but also covers various aspects including economic and geopolitical factors. This law has been necessitated looking at the global scenario,” he said.

The levy was enacted overnight with no stakeholder consultation and only directed towards foreign e-commerce players. The study appreciates the levy as a measure to mobilize additional revenues, but cautions against the perception as a measure to incentivize domestic suppliers. It notes that such sentiments would invariably impact foreign investor sentiments and demoralize investors in the digital space.

Mr Amit Rana, Partner, PwC stated that there is an absence of intent on what the government wanted to tax. “Every law comes with a statement of objectives. 2020 levy does not have that. So there is a big shortcoming in our ability to interpret,” he said.

According to Rana, given the current COVID situation, the government could not come out with a list of frequently asked questions (FAQs) to guide the stakeholders. “However they amended the online tax challan to include non-resident e-commerce suppliers on the 4th of July and the first compliance due date is today that is the 7th of July,” he said.

He also added that most industry players want to comply 100 percent, but the guidance came in too late. “The government should consider this and should not impose a penalty or interest on the delay as it is not the fault of the taxpayer,” He pointed out.

Dr Rajat Kathuria, Director and Chief Executive, ICRIER explained that the perils of the levy needed to be discussed so that the issues which stem out can be nipped in the bud. “There would be a huge impact of the levy on the SME sector that is a vehicle of job creation today. The time in the economy is such that things are getting worse. Globally the governments are trying to latch on anything to generate revenue to tackle the situation,” he said.

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