Centre's proposal on digital tax maybe challenged in court

The Centre's clarification on equalisation levy, or digital services tax, during the Budget for 2021-22 could be challenged in court. Many companies may file writ petitions on the grounds of extraterritorial overreach.

The expanded scope of the equalisation levy, a 2 percent tax on non-resident e-commerce operators, came into effect from April 1, 2020.

"Several companies are contemplating filing a writ petition against the Budget. Deliberations are going on, given the huge hit it will have on earnings of not just foreign players, but their Indian partners and subsidiaries. The clarification has left several companies in a fix as they may now fall under the tax because of the way it drafted, even though that may not be the intent of the government," a tax consultant told the paper.

According to the report, the levy will also be challenged under bilateral treaties since it is perceived as "a disguised form of income tax, designed to circumvent India's obligations under the tax treaties".

Here are some clarifications the Centre made in the Budget about the tax:

· Royalty and fees for technical services will be excluded from equalisation levy

· The levy applies if a person buys the goods or services through an IP address located in India

· The taxable amount includes consideration for the sale of goods, irrespective of whether the e-commerce operator owns the goods.

· The taxable amount includes consideration for the provision of services, irrespective of whether service is provided or facilitated by the e-commerce operator.