3/10/2016 Taxsutra

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Jaitley: Presumptive taxation scheme turnover limit increased to 2cr. 8% presumptive tax. 

Budget 2016 : Fine print decoded

Sunil Agarwal (Advocate, Senior Tax Partner, AZB & Partners) BEPS Implementation in India- A discordant Note in Budget 2016

1.         Base Erosion & Pro t Shifting ("BEPS"), being the scourge of tax systems the world over, Indiahas played a very pro-active and constructive role with G-20  nations and other OECD member statesin the deliberations and formulations leading to   15 point action plan of BEPS released about 6months ago in October 2015.   The hallmark of BEPS has been the spirit of consensus and co-operation among the international community to come out with measures which address concerns ofalmost every country in the world, which is something unique and never seen in the last almost 100years since some kind of international Tax Treaties have been in existence. This Article attempts tohighlight a discordant note with regard to Equalisation Levy, in Finance Bill, 2016 ("FB"), whereapparently there is a deviation from international consensus in BEPS deliberations.

2.         Out of 15 point action plan of BEPS, India Budget 2016 proposes to implement the following 3points:

Action 1:    Addressing challenges of digital economyAction 5:    Implementation of Patent Box Regime.Action 13:  Master File and CbC reporting in Transfer Pricing documentation.

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3.         While Action 5 and Action 13 are implemented through amendments to Income Tax Act, 1961["ITA"], which is the expected usual mechanism; Action 1 is implemented not through ITA but byChapter VIII of FB by enacting a tax called  Equalisation Levy.

4.         Main features of Equalisation Levy are:

Supposedly, a tax on non-resident not having a traditional brick and mortar PE but having awebsite PE, thereby not taxable in source state on its business receipts under traditional PErules.However resident to pay 6% tax  on gross amounts  paid to such non-residentNon-resident recipient exempt from tax in India under proposed section 10(50) of ITAEntire liability on payer resident to deduct and pay to the government. All consequences of non-compliance including disallowance under newly proposed section 40(a)(ib) on payer resident.

5.               Equalisation Levy is one of the other 3 options considered in BEPS deliberations as statedbelow (Para 345 of Final Report on Action 1)

“345. The technical details of the other three options were developed over 2015 in a way that allows them tobe applied individually (i.e. a new “signi cant economic presence” nexus for net-basis taxation based withdeemed pro t attribution methods, the application of a withholding tax, or an equalisation levy) or combined.The application of these options would generally allow countries to impose a tax in situations where a foreignenterprise derives considerable sales income from the country without a physical presence therein, and/oruses the contributions of in-country users in its value chain, including through collection and monitoring ofdata.”

  6.              A multilateral treaty instrument has been considered as the most desirable approach forimplementing BEPS vide Action Point 15. For ready reference, relevant extract reproduced below: 

"8. A multilateral instrument facilitates speedy action and innovation. A multilateral instrument willimplement agreed treaty measures over a reasonably short period and at the same time it would preserve thebilateral nature of tax treaties. This innovative approach has at least three important advantages. First, itwould help ensure that the multilateral instrument is highly targeted. Second, it would allow all existingbilateral tax treaties to be modi ed in a synchronised way with respect to BEPS issues, without a need toindividually address each treaty within the 3000+ treaty network. Third, it responds to the politicalimperatives driving the BEPS Project: it allows BEPS abuses to be curtailed and governments to swiftlyachieve their international tax policy goals without creating the risk of violating existing bilateral treatiesthat would derive from the use of unilateral and uncoordinated measures.”

 

7.         The agreed approach is further embodied in para 383, fourth and fth bullet of Final Report onAction 1 i.e. Digital Economy:

                      "383. As regards the different options analyzed, the Task Force on Digital Economy                 ["TFDE"]concluded that:

            …………………………………….

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………………………………..………………………………..Some aspects of the broader direct tax challenges currently raised by the digital economy are expected tobe mitigated once the BEPS measures are implemented. A quick implementation of the BEPS measures isneeded, together with mechanisms to monitor their impact over time.

 None of the other three options analyzed by the TFDE were recommended at this stage. This is because,among other reasons, it is expected that the measures developed in the BEPS Project will have asubstantial impact on BEPS issues previously identi ed in the digital economy, that certain BEPSmeasures will mitigate some aspects of the broader tax challenges, and that consumption taxes will belevied effectively in the market country.

 Countries could, however, introduce any of the options in their domestic laws as additional safeguardsagainst BEPS, provided they respect existing treaty obligations, or in their bilateral tax treaties.Adoption as domestic law measures would require further calibration of the options in order to provideadditional clarity about the details, as well as some adaptation to ensure consistency with existinginternational legal commitments."

8.            The above discussion shows that multilateralism, reciprocity and a conscious regard tointernational treaty obligation has been the hallmark of BEPS deliberations all along andunilateralism is sought to be discouraged (please see underlined portion in later part of para 6 above).Even Constitution of India vide Article 51(c) requires the Government of India to endeavor to:

            “Article 51 - Promotion of international peace and security

The State shall endeavour to-

(a) ………………………….

(b) ……………………………

(c) foster respect for international law and treaty obligations in the dealings of organised peoples with oneanother; and

(d) ………………………….”

9.         As against the above back-ground, what we see is that Equalisation Levy does not fall within thecharging sections of ITA namely section 5 and 9. Ex consequenti, the effect of imposing this levythrough FB rather than ITA results in defeating the option available to a non-resident of choosing themore bene cial option between the Treaty and ITA under section 90 of the ITA. Assuming the payerincludes the Equalisation Levy as cost in the consideration payable to service provider thus effectivelypassing on the tax burden on the non-resident service provider, it is dif cult to see whether the non-resident will be eligible to take credit of Equalisation Levy as foreign tax credit in his country ofresidence. This leads to double-taxation. It is important to note that both: avoidance of double-taxation and avoidance of double non-taxation are the paramount concerns of BEPS.

10.       India currently is one of the large economies growing at a very fast clip. Such nation should not,ideally, be seen to be bypassing international treaty obligations. It is therefore expected that this new

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levy may be brought within the fold of ITA, so that the levy eventually gets covered by the multilateraltreaty instrument, thus promoting the true objective of BEPS project, which in any case is bene cial tothe comity of nations at large.