Encouraged by ballooning revenue from the equalisation levy on online advertising fees, the government feels there is scope to expand it to digital content streaming companies
such as Netflix
and Amazon Prime, said sources in the know.
The collection target this year is steep and the revenue situation less than ideal. In such a scenario, the government might consider the proposal to tax these services in the Budget, to be presented next week.
In 2018-19, collections from the equalisation levy touched Rs 1,000 crore — up from Rs 560 crore in FY18 and Rs 200 crore in FY17. The levy was introduced in FY17.
“Growing collections under the equalisation levy is encouraging. There is scope to expand it further to internet content-streaming companies, but not beyond, at this point,” said a government official who wished to remain anonymous.
“With the issue of taxing digital companies
going on at a global level, we don’t want to be seen as going overboard with it unilaterally.”
India has been pressing for widening the scope of permanent establishment (PE) to tax digital firms such as Google and Facebook at the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting Inclusive Framework.
The equalisation levy is, however, seen as an easier method to tax digital companies
as it can be adopted under domestic laws without requiring amendment of a large number of tax treaties. This is not a tax on income.
The committee on equalisation levy had proposed it on digital services at a business-to-consumer level as well, such as downloading of music or apps, or payments for cloud computing, etc ranged between 6 per cent and 8 per cent.
Aware that the levy may be getting passed on to the consumer, the government is examining ways to ensure that it is the foreign entity that actually bears the cost, by way of payment gateways for instance. That will also reduce the obligations of depositing the tax and documentation on the payers.
In the Budget last year, the government proposed the significant economic presence principal, under which the number of Indian users and a revenue threshold should be used to tax business profits of non-resident digital companies derived from Indian consumers.
However, that requires amendment of each double taxation-avoidance agreement, making it challenging. Hence, a multilateral instrument under OECD Base Erosion and Profit Shifting framework, where all tax treaties will get amended automatically.
Finance Minister Nirmala Sitharaman earlier this month pitched for adoption of “significant economic presence” concept for taxing global digital companies, which considers the “evidence of their purposeful and sustained interaction with the economy of a country” irrespective of their physical presence in the company.