How to tax e-commerce businesses'? - Equalisation Levy is an answer

1. Background

Finance Minister has proposed Equalisation Levy (EL) through Finance Bill, 2016, Chapter VIII.

E-commerce companies like Face Book, Google, etc. are growing very fast, earning substantial revenues and some of them are avoiding Income-tax in the Country of Source (COS) as well as Country of Residence (COR). E-commerce business is growing at the fastest rate globally and no Government in the world can allow this business to go tax free.

It is now admitted by OECD and other concerned authorities that under the present rules of international taxation, E-commerce companies can escape taxation. The main reason is that under the existing rules of international taxation, COS can tax a non-resident providing E-commerce services only if the non-resident has a permanent establishment (PE) in the COS. E-commerce companies do not need PE in any COS. They can set up the companies in tax havens and avoid COR tax also. For the last few years, there was strong public criticism – in Britain and other European countries - of these companies escaping taxation. In the light of the American and European financial crisis, G20 countries asked OECD to come out with recommendations for necessary modifications in the existing rules so that E-commerce companies also can be taxed.

Kick to Startup India initiative

The economy of any country depends on quality of its people. Larger the number of employed people, better will be the economy. The importance of promoting entrepreneurs has been recognised by the Indian Government. 'Startup India, Stand up India' is one such campaign for creating a conducive environment for ‪‎startups in India. It aims to boost entrepreneurship, encourage startups with job creation and building an economy driven by technology.

For empowering startups to grow through innovation and technology, the Indian Government announced startup India: Action Plan [plan] which addresses all aspects of the startup eco-system. The plan proposes a 19 point action list which inter-alia includes compliance regime based on self-certification, startup India hub, rollout of mobile app and portal, legal support and fast-tracking patent examination at lower cost, faster exits, funding support through a 'funds of funds' with a corpus of INR 10,000 crore, etc. It also proposes to provide tax exemptions on profits, capital gains, and investment above fair market value subject to fulfillment of certain conditions. The objective to give these exemptions is to promote investments into/growth of startups and address the working capital requirements.

Recently, the Government has issued a notification wherein the term 'startup' has been defined and the procedure for its recognition and obtaining tax benefits has been prescribed.

‘Race against deadline’ for Companies eager to declare interim dividend

The companies suddenly seem to be in a rush to declare interim dividend. The driving reason behind this rush lies in the amendments inserted in the Finance Bill, 2016.

Finance Bill, 2016, seems to have caught hold of the income which was getting taxed at a lower rate. As per the provisions of the Income Tax Act, 1961("IT Act"), dividend distributed by companies, are exempt in the hands of the shareholders by way of exemption under section 10(34) IT Act. Thus, companies are liable to pay distribution tax under section 115-O of the IT Act, at the rate of 17.304% (i.e. basic rate of 15% plus surcharge of 12% and cess of 3%).

Through the FinanceBill 2016, a new section has been introduced (i.e. 115BBDA) to provide that, where the dividend is to be paid to resident individuals, HUFs and Firms then, there would be an additional tax at the rate of 10% in the hands of the investors. This step by the Hon'bl Finance Minister aims at taxing such portion of income which was getting escaped from the ambit of tax, in the hands of those investors, who are subjected to higher tax rate (i.e. 30%).

Our Budget expectations once again come to fruition

Every year ‘Taxmann’ predicts and suggests various substantive and procedural changes to taxation laws based on judicial litigations, prevalent uncertainties and change in the business environment. We met several expectations for Union Budget 2014-15 and 2015-16 which were published in [2014] 47 taxmann.com 297 (Article) and [2015] 61 taxmann.com 143 (Article).

This year also we have released our Budget expectations in [2016] 67 taxmann.com 45 (Article). It is to our credit that many of our expectations came to fruition in the Union Budget 2016 as well.