Technology, considered as a factor of production, has virtually been adopted in all sectors of the economy in order to enhance productivity, enlarge market reach, and reduce operational costs. The adoption of technology is demonstrated by the spread of broadband connectivity in businesses, which in almost all countries of the Organisation for Economic Co-operation and Development (“OECD”) is universal for large enterprises and reaches 90% or more even in smaller businesses.
The advent of technology and process of globalization has merged the digital and traditional economy into one. Large scale adoption of technology has enabled Multinational Enterprises to operate their business across the world without any physical presence or minimal presence in other jurisdictions.
Conventional tax rules, including tax treaty provisions, have not been able to effectively tax MNEs operating in several jurisdictions without creating any tax liability. In response to this concern, and at the request of the G20, the OECD published an Action Plan on Base Erosion and Profit Shifting in July 2013. In 2015, a final report was issued by OECD inter-alia capturing conclusions regarding digital economy, issues associated with BEPS and recommended next steps. Action Plan 1 in the BEPS report calls for work to address the tax challenges of the digital economy.
OECD BEPS report provided certain recommendations to address tax issues arising from digital transactions through bilateral or multilateral changes to the tax treaty/(ies). However, several countries including India started taking unilateral actions to amend the domestic tax law in order to deal with the challenges posed by digitalization.
India has been a front-runner to levy tax on digital transactions by amending the domestic tax law. One of the key amendments was introduction of Equalisation Levy in 2016.
Equalisation Levy in India – 2016
The scope of Equalisation Levy in India, as introduced in 2016 (with effect from April 1, 2016) and the applicable rate is as follows:
|Parameters||Scope / meaning|
|Charge of Levy||Equalisation Levy will be chargeable at the rate of 6% on the amount of consideration for any “specified services” received or receivable by a non-resident person.|
|Specified services meaning||“Specified services” means online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf.|
|What is meant by “online”||Online means a facility or service or right or benefit or access that is obtained through the internet or any other form of digital or telecommunication network.|
|Payers covered||Levy will be chargeable on consideration paid or payable by (i) a person resident in India carrying on a business or profession; and (ii) non-residents having a PE in India.|
|Collection mechanism||Payers covered (as above) shall deduct Equalisation Levy at the rate of 6% on the amount of consideration paid to non-resident for specified services.|
|Exemption||Any income arising from any specified service and chargeable to Levy shall be exempt in the hands of the recipient non-resident service provider.|
|Tax credit in home country||Equalisation Levy 2016 has been introduced as a part of a Finance Act and not by way of amendment to the Income Tax Act, 1961. Given this, Levy may not qualify as “tax” for the purpose of tax treaty. Hence, non-resident service provides may not be able to claim credit of such Levy deposited in India against their tax liability in home jurisdictions.|
Equalisation Levy 2016 was narrower in scope in that it essentially covered payment for online advertising services in the context of B2B transactions. In addition, one of the critical aspects of 2016 Equalisation Levy ,was that the non-resident service provider were not directly liable to pay tax / Levy in India; the collection and recovery mechanism inter-alia provided that the Indian resident payer shall be under an obligation to pay Equalisation Levy and will face consequences (interest and penalties) should there be a default.
This mechanism substantially changed when Government of India expanded the scope of Equalisation Levy in 2020.
Equalisation Levy 2020 / Expanded Levy
Initially, during the Union Budget proposals of 2020 (Finance Bill 2020) announced in February 2020, the Government did not alter the scope of 2016 Levy. However, while the Finance Bill was being passed by the Parliament in March 2020, the Government of India expanded albeit substantially, the scope of Equalisation Levy (“Expanded Levy”).
A snapshot of key provisions of Expanded Levy is as follows:
|Parameters||Scope / meaning|
|Charge of Expanded Levy||Equalisation Levy will be chargeable at the rate of 2% on the amount of consideration received or receivable by an “e-commerce operator” from “e-commerce supply or services” made or provided or facilitated by it.|
|E-commerce operator – who?||“E-commerce operator” means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both.|
|What is e-commerce supply or services?||“E-commerce supply or services” is defined to mean (i) online sale of goods owned by the e-commerce operator, or (ii) online provision of services provided by the e-commerce operator or (iii) sale or services facilitated by the e-commerce operator.|
|E-commerce supply or services to whom?||Expanded Levy will apply when e-commerce supply or services is made or provided or facilitated by e-commerce operator to:
· person resident in India; or
· non-resident under “specified circumstances” such as: sale of advertisement which targets an Indian customer or a customer who accesses the advertisement though IP address located in India; or through sale of data collected from a person resident in India or from a person who uses IP address located in India; or
· person who buys goods or services through an IP address located in India.
|Collection and recovery||Unlike 2016 Equalisation Levy , where Levy was payable by the Indian resident payer, the Expanded Levy casts an obligation on the non-resident e-commerce operator to pay Equalisation Levy and comply with prescribed filings. This could create huge burden for the non-resident e-commerce operator to obtain tax registrations in India, deposit Levy and undertake various filings.|
|Tax credit in home country||Similar to 2016 Equalisation Levy , Expanded Levy has been introduced as a part of a Finance Act and not by way of amendment to the Income Tax Act, 1961. Hence, non-resident e-commerce operators may not be able to claim credit of such Expanded Levy paid in India against their tax liability in home jurisdictions.|
|Exemption||Similar to 2016 Equalisation Levy , any income from e-commerce supply or services made or provided or facilitated (and chargeable to equalisation levy) shall be exempt from tax. However, such exemption is available only from April 1, 2021 while the Expanded Levy applies from April 1, 2020.
This gap of on year, in granting exemption, may create unintended consequences and double whammy for non-resident e-commerce operator. Indian payers may apply withholding tax (to the extent applicable) on payment for e-commerce supply or services till March 31, 2021 and simultaneously non-resident e-commerce operator will also be liable to pay Equalisation Levy .
Expanded Levy – certain other aspects
The definition of e-commerce operator and e-commerce supply or services in Expanded Levy is wide enough to cover a large portion of online transactions. In fact, the definition travels beyond the normally understood connotation of B2B sales, trading, distribution arrangements and intra-group transactions which are now likely to be covered within Expanded Levy.
In today’s world, a significant portion of transactions are undertaken online. In fact, traditional brick and mortar businesses also have online facilities for accepting orders or processing payments. All such businesses are now likely to be covered within Expanded Levy even though they may traditionally not be undertaking actual online sales or providing online services.
In the context of services as well, the Expanded Levy casts a wider net. Take for example online hotel booking or flight booking undertaken by an Indian customer for stay or travel outside India. Such transactions are also covered within these new provisions. Online services or intra-group support services provided within group companies may also be covered within the provisions of Expanded Levy.
One must refer to the Report of the Committee on Taxation of E-Commerce (“Report”) on “Proposal for Equalisation Levy on Specified Transactions”. The Report was issued in February 2016 basis which Equalisation Levy was introduced for the first time in India in the year 2016. The Committee in its Report noted that the Equalisation Levy should be limited to the payments made for certain prescribed services where such services are either received, utilized, provided or performed in India, and thus have a nexus with India, irrespective of whether the payment is made by a resident or a non-resident person. The scope of Expanded Levy goes beyond the requirement of a nexus with India.
The Expanded Levy was introduced on March 27, 2020 with effect from April 1, 2020. Non-resident e-commerce operators will need to put systems in place, identify transactions and deposit Levy for first quarter (April – March 2020) by July 7, 2020. Considering this is a new Equalisation Levy , with significant wider scope, Government should provide guidelines / FAQs on the manner in which Expanded Levy will be implemented including their thoughts on the scope of transactions sought to be covered within Expanded Levy.
India has been a front-runner to introduce digital tax in all its possible form. Specifically, in the context of Expanded Levy, non-resident e-commerce operators have been caught off-guard more so since it is introduced at a time when they battle the fallout from the coronavirus pandemic.
This is an unprecedented levy during uncertain times and stakeholders are eagerly waiting for the Government to issue clarifications in time to come. There is a desperate hope that the levy is deferred by six months or a year during which time the scope is clarified, and appropriate infrastructure is put in place by non-resident e-commerce operator to comply with the law.
(The views of the author(s) in this article are personal and do not constitute legal / professional advice of L&L Partners, New Delhi)