J&K loses special status: Google tax may be levied in new Union Territory

India’s version of Google tax, or the equalisation levy, may now be applicable in Jammu & Kashmir. With Parliament passing a Bill to revoke Article 370, digital commerce operators advertising on global social media, which earlier did not pay Google tax on their operations in Jammu & Kashmir, may now have to cough it up at 6 per cent.

According to people across companies, firms such as Facebook, Google, Amazon and Flipkart, among others, are all trying to figure out various tax implications of the government’s move.

“We are assessing if we need to start paying additional taxes, and also if we have to change our accounting strategies. This will take a few weeks as the government has just made the announcements. We will get a better idea after we have a meeting with the tax department in Jammu & Kashmir,” said a senior management member at one of the biggest e-commerce firms.

Industry experts believe the equalisation levy is something that may be applicable to the region, but only after specific amendments are made. “Foreign e-commerce operators who pay the equalisation levy at 6 per cent, do not have to be pay such levy on their advertisements in J&K. This may change. However, specific amendments to the provisions will have to be made to make it effective,” said Indruj Rai, tax partner at Khaitan & Co.

Experts, however, believe nothing may change for e-commerce firms in terms of the Income Tax Act, as it existed in J&K even under the old mechanism. 

“The Income Tax Act, 1961, is one of the laws that was applicable to the whole of India including Jammu & Kashmir. Hence, nothing will change for e-commerce operators after the effective revocation of Article 370 under the Income Tax law,” said Atul Pandey, partner, Khaitan & Co.

The equalisation levy was introduced in June 2016, but not through an amendment in the Income Tax Act despite being a form of direct tax. It came into effect through a chapter in the Finance Bill, 2016. As such, the ability of a non-resident to claim credit in its jurisdiction may be doubtful, even under the tax avoidance agreements. 

Under this regime, tax is levied at the rate of 6 per cent of the gross consideration received by a non-resident for online advertisement and related spheres, provided to a resident in India or to a non-resident having a permanent establishment in India, except J&K. The levy is paid by advertisers.