Equalisation Levy 2.0 - Proposed Amendments
“In order to tackle the tax challenges due to digital economy, several measures are being implemented globally. In this quest, India introduced Equalisation Levy (‘EQL’) in 2016, which was subsequently expanded in 2020. To address the issues faced by industries while applying the EQL provisions, amendments have been proposed in Union Budget 2021 to rationalise and / or clarify the EQL provisions. Read on…”
Proposed Amendments at a Glance
- Exemption Alignment under Section 10(50): To address the issue of double taxation emerged due to amendment brought in Finance Act, 2020, it has been proposed that the transactions which have been subjected to EQL provisions shall be exempt from income tax w.e.f. Financial Year (‘FY’) 2020-21 and onwards (instead of FY 2021-22).
- Royalty and FTS Exclusion: It has been clarified that EQL provisions shall not apply to the income of non-resident which is in the nature of royalty or fees for technical services.
- Statutory Scope of Online Transactions: Certain expressions such as ‘online sale of goods’ or ‘online provision of services’ have now been defined, which are relevant to determine the applicability of EQL provisions on e-commerce operators.
Background and Legislative Genesis
The global economy has undergone a drastic change in last few years in the way of conducting business. Instead of the traditional brick-and-mortar approach of doing business, a good number of business activities can be carried out nowadays through digital or electronic means. This digital economy is a result of various evolving business models such as e-commerce, digital advertisements, social media, payment gateway, etc. Numerous online businesses are now carrying on their business across the world without having any physical presence in a particular jurisdiction (say, India).
In such cases, the online businesses might not be subjected to any tax in that jurisdiction (India) on their revenue, in light of the beneficial provisions under the tax treaties, and thus resulting in a loss of tax revenue to the Indian government.
In order to tackle the aforesaid tax challenges due to digital economy, countries are implementing several measures by taking a cue from the OECD - G20 project on Base Erosion and Profit Shifting (BEPS). Action Plan 1 of such project which deals with the tax challenges of digital economy, made certain suggestions to address these challenges. One of such measure was EQL, which was introduced in India through the Finance Act, 2016 (‘FA16’).
In FA16, EQL @ 6% was made applicable in respect of income of a non-resident from specified services, i.e., online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement (commonly referred to as ‘EQL 1.0’). These provisions were particularly relevant in the context of search engines that provide online advertisement, online classifieds, social media applications and websites which have provisions for promoted content and advertisements.
In Finance Act, 2020 (‘FA20’), the scope of EQL was expanded to cover non-resident e-commerce operators w.e.f. FY 2020-21 (commonly referred to as ‘EQL 2.0’). As per expanded scope, EQL @ 2% was levied on any consideration received or receivable by a non-resident e-commerce operator from e-commerce supply or services made or provided or facilitated by it to:
- a person resident in India; or
- a non-resident (in respect of the sale of advertisements targeted at, or data collected from, a person resident in India or using an IP address located in India); or
- a person who buys goods or services using an IP address located in India.
Meaning of e-commerce supply or services
The term ‘e-commerce supply or services’ was defined as:
- Online sale of goods owned by the e-commerce operator; or
- Online provision of services provided by the e-commerce operator; or
- Online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
- Any combination of activities listed hereinabove.
Further, at that time, Section 10(50) of the Income-tax Act, 1961 (‘the Act’) was also amended to clarify that any income from any e-commerce supply or services that has been subjected to EQL provisions, shall not be taxable w.e.f. FY 2021-22.
“Earlier, there was no clarity that whether income of a non-resident e-commerce operator in the nature of royalty and fees for technical services, which are anyway taxable under the Act read with the tax treaty, could also be subjected to EQL 2.0.”
Issues and Amendments
There were certain loose ends in the existing provisions for which the stakeholders were looking forward to certain clarifications. In order to rationalise and / or clarify, the following amendments have been proposed:
1. Addressing the double taxation for FY 2020-21
The amendment brought through FA20 resulted in an issue / anomaly that while provisions of EQL 2.0 were applicable with effect from 01 April 2020, the corresponding exemption from income tax in the hands of non-resident recipients was applicable only from 01 April 2021. It meant that during FY 2020-21, such income will be taxable under the Act and will also be subject to EQL 2.0 (as the exemption was available for FY 2021-22 and onwards).
Amendment to Section 10(50) of the Act
In order to remove the aforesaid double taxation, Union Budget 2021 has proposed to amend Section 10(50) of the Act, to provide that any income of a non-resident, which has been subjected to EQL 2.0, shall not be taxable under the Act w.e.f. 01 April 2020. Thus, making the said income exempt for FY 2020-21 as well.
2. Should Royalty and Fee for Technical Services be subject to EQL provisions or Income-tax provisions?
Earlier, there was no clarity that whether income of a non-resident e-commerce operator in the nature of royalty and fees for technical services, which are anyway taxable under the Act read with the tax treaty, could also be subjected to EQL 2.0.
Also, there was a potential for abuse that a taxpayer could offer certain reasons to levy EQL at the rate of 2% (by taking a position that they qualify as e-commerce operator and their supply comes under the purview of e-commerce supply) on an income in the nature of royalty and fees for technical services and claim exemption under Section 10(50) of the Act, where such income is subjected to tax at 10% under the Act (ignoring beneficial provision under the tax treaty, if any) and could have a saving of 8%.
Section 163 of the FA16 and Section 10(50) of the Act - exclusion of Royalty and Fee for Technical Service from the ambit of EQL
In order to remove the confusion amongst the taxpayers and to eliminate the aforesaid potential for abuse of Section 10(50) of the Act, it is now proposed to insert an explanation to Section 163 of the FA16, to provide that consideration received or receivable for specified services and e-commerce supply or services shall not include consideration which is taxable as royalty or fees for technical services in India under the provisions of the Act read with respective tax treaty.
A corresponding amendment has also been proposed in Section 10(50) of the Act, to clarify that said exemption will also not apply to income in the nature royalty or fees for technical services taxable under the Act read with the tax treaty.
3. What qualify as ‘online sale of goods’ or ‘online provision of services’?
The provisions of EQL 2.0 were made applicable to e-commerce supply or services, which were defined to mean ‘online sale of goods’ or ‘online provision of services’. The expressions ‘online sale of goods’ or ‘online provision of services’ are very broad terms and have not been defined anywhere in the Act and EQL provisions.
In the absence of any definition of these terms, there was no clarity as regards the applicability of EQL 2.0 where only one element of sale (such as, placing of an order) has taken place through an online medium (such as, an application or email), would it be considered as subjected to EQL 2.0 by the tax authority particularly, when such electronic medium is being maintained and managed by the seller.
There could be an interpretation that if all the elements of a sale transaction (i.e. from placing an order to till the transfer of title of goods) have occurred online, then only same could be treated as an online supply of goods, which could exclude a large number of physical goods sold online from application of EQL 2.0.
Further, there could be another interpretation that if an order has been placed through an email and where the platform / server used for placing such order is being maintained and managed by the online seller itself, then that could also be classified as e-commerce operator and thus subject to EQL 2.0.
“There could be an interpretation that if all the elements of a sale transaction (i.e. from placing an order to till the transfer of title of goods) have occurred online, then only same could be treated as an online supply of goods, which could exclude a large number of physical goods sold online from application of EQL 2.0.”
Definition of ‘online sale of goods’ or ‘online provision of services’
In order to clarify the meaning, it is now proposed that an e-commerce supply or service will be subject to EQL 2.0 when any of the following activities takes place online:
- Acceptance of offer for sale; or
- Placing of purchase order; or
- Acceptance of the purchase order; or
- Payment of consideration; or
- Supply of goods or provision of services (partly or wholly).
On a plain reading of the aforesaid proposed amendments, it appears that the legislature is in favour of levying EQL 2.0 on every transaction including which has taken place entirely in physical world (i.e. without having any element involving electronic means) as long as one single part of such transaction has happened online (for which a platform has been managed by the e-commerce operator).
Therefore, this provision may result in a radical expansion of scope of EQL 2.0, perhaps far beyond its original intent.
Conclusion & Lingering Ambiguities
The objective of amendments brought through Union Budget - 2021 is to clarify the position and intent of the government of introducing the EQL 2.0. While it seeks to clarify certain doubts and settle certain ambiguities, there is still a need for further clarifications to reflect and provide more clarity on other aspects (such as, availability of treaty benefit where EQL provisions apply, applicability of EQL provisions on physical supply of goods, absence of advance ruling mechanism, etc.) to make this levy more viable and acceptable.