Broadening the Scope of Equalization Levy
CA. Puneet Sawhney
The author is a member of the Institute. He can be reached at sawhney.puneet@rediffmail.com and eboard@icai.in.
“The first significant step taken by India to address the tax challenges arising out of digitalisation of economy was in 2016, through the introduction of Equalization Levy (EL) in the Finance Act with effect from 1st June 2016. The EL was levied at the rate of 6% on the amount of consideration for ‘specified services’ received or receivable by a non-resident not having a Permanent Establishment (PE) in India, from a resident in India who carried out business or profession, or from a non-resident having a PE in India. Essentially, this was a B2B levy. Read on to know more…”
Background – The 2016 Equalization Levy Framework
The term ‘Specified services’ was defined as follows:
- Online advertisement
- Any provision for digital advertising space or any facility/ service for the purpose of online advertisement
- Any other service which may be notified later by the central government
Amended Finance Bill 2020 Broadened the Ambit of EL
The Amended Finance Bill 2020 expanded the imposition of EL, to cover foreign e-commerce operators. This came as a surprise to many as the provision was not proposed in the Union Budget when it was presented by Finance Minister on February 1. There were hence no discussions or deliberations on this change, with the stake holders.
The expanded provisions provide that effective April 1, 2020, EL shall be charged at the rate of 2% of 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:
- (i) to a person resident in India; or
- (ii) to a non-resident in the specified circumstances; or
- (iii) to a person who buys such goods or services or both using internet protocol address located in India.
The term “specified circumstances” has been defined to mean:
- (i) sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India; and
- (ii) sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India;
It has further been provided that the EL shall not be charged:
- (i) where the e-commerce operator making or providing or facilitating e-commerce supply or services has a PE in India and such e-commerce supply or services is effectively connected with such PE;
- (ii) where the EL is leviable @6% ; or
- (iii) sales, turnover or gross receipts, as the case may be, of the e-commerce operator from the e-commerce supply or services made or provided or facilitated is less than INR 20 million during the previous year.
The EL, shall be paid by every e-commerce operator to the credit of the Central Government in the following manner:
Under these newly inserted provisions the e-commerce operator has been defined as follows:
“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;
“e-commerce supply or services” has been 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) online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
- (iv) any combination of activities listed in clause (i), (ii) or clause (iii) above.
The OECD Connect
Concept of EL can be traced to the OECD and G20 led BEPS project, where it was part of BEPS Action Pan 1, which deals with the tax challenges of the Digital Economy. As we all know, historically the tax systems have centred around taxation based on physical presence test and have not been able to keep pace with the new digital businesses and newer ways of doing existing business. There are challenges in terms of nexus, data and characterisation of income, which in turn lead to double non taxation and shifting of profits by MNCs to low tax jurisdictions.
“There are challenges in terms of nexus, data and characterisation of income, which in turn lead to double non taxation and shifting of profits by MNCs to low tax jurisdictions.”
The OECD BEPS Action Plan 1 Report released in 2015, had recommended that countries could use EL in their domestic laws as additional safeguards against BEPS, provided they respect existing treaty obligations, or in their bilateral tax treaties.
Practical Challenges / Clarifications Required
This expansion of EL has posed several challenges, namely:
“Unlike EL in case of advertisement and related services, compliance obligation in this case is on the e-commerce operator (non-resident), who is required to deposit the EL so collected on a quarterly basis and also file an annual return.”
- a) Compliance Burden on Non-Residents: Unlike EL in case of advertisement and related services, compliance obligation in this case is on the e-commerce operator (non-resident), who is required to deposit the EL so collected on a quarterly basis and also file an annual return. This has given very little time to the e-commerce operators for planning their tax compliances or changing the ERP systems to incorporate this change.
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b) Differing Operating Models & Tax Base: There are different operating models used by e-commerce operators:
- – One such model is a pure play commission based model, wherein the e-commerce operator provides its platform to the ultimate sellers and buyers. In this model, the buyer pays purchase price to the seller while the e-commerce operator gets the commission for the platform used. In such a case, the EL should ideally be on the commission amounts.
- – The other model is where the e-commerce operator sells in its own name as if the goods are part of its stock/inventory. Here the EL should be on the transaction value. Accordingly, the amounts on which EL should be levied require clarity.
- c) Net vs Gross Amounts: Another issue being, whether the EL should be imposed on the net amounts i.e. net of sales return; given the flexibility in the business models of e-commerce players to return the goods if customer is unhappy with the product or for any defects.
- d) Extra-Territoriality Concerns: There also could be legal challenges from the perspective of extra-territoriality as the provision also covers non-resident to non-resident transactions, which uses India data.
- e) Foreign Tax Credit Denial: As EL is not part of income tax, non residents may not get credit for it in their country of residence or home country.
“There also could be legal challenges from the perspective of extra-territoriality as the provision also covers non-resident to non-resident transactions, which uses India data.”
Conclusion
To conclude, though the intent of the government is to garner additional revenue by tapping the digital business which is otherwise escaping tax net in India, the issues created due to the hasty implementation, could fuel uncertainty and unnecessary litigation and should be quickly addressed. ■■■