Equalisation Levy – Proposed Amendments in 2021

The biggest advantage of the digital business over traditional brick and mortar form of business is the ease with which companies can promote and sell their goods, and that too at a reduced cost. From a customer perspective it brings advantages in the form of ease in procurement as well as lesser cost in cases where a part of cost saved is passed on by the company to the consumer. Digital platforms are becoming the new market place due to spread of internet and increased mobile connectivity.

While digitalisation on the one hand is changing the business dynamics including the way business is done, it is also posing some serious challenges for the tax authorities worldwide. The major challenge is that the existing international tax rules provides taxing rights to one jurisdiction only if nexus is established and one of the key characteristics of a digital business is ability to operate remotely without creating any physical presence. Thus, existing international tax principles have been rendered somewhat inadequate to tax digital transaction and this has created concern in tax jurisdictions across the globe, more so the ones with large consumer base, as they tend to lose a substantial share of tax revenue.

Recognising this, on the initiation of G20, under the Base Erosion and Profit Shifting (BEPS) project, OECD examined challenges to the existing tax system due to digitalisation of economy. This resulted in BEPS Action Plan 1, published in 2015. Since, then a lot of work has been done in this direction including proposals to allocate taxing rights to the user jurisdiction as well as mechanism for determination of taxable income.

However, considering the existing differences between member countries and conditions due to COVID pandemic, it would still require considerable time for OECD to come out with a globally accepted approach. While the OCED through its task force is working aggressively to devise an appropriate methodology to tax digital transactions, various countries, including India, considering the magnitude of digital transactions and impact it has in terms of loss of tax revenue, have adopted one sided measure to tax digital revenues derived from their jurisdiction. India introduced Equalisation Levy to tax certain digital transactions.

Equalisation Levy in India

Equalisation Levy (EL) was introduced by the Finance Act, 2016 (effective from 1st April 2016) wherein digital services in the nature of advertisement, provision of space for digital advertisements or any other facility or services for the purpose of online advertisement were made subject to equalisation levy of 6%. Thus, any resident making payment to a non-resident for any of the above services is required to deduct equalisation levy and pay the amount to the credit of central government within 7 days from the end of month in which EL was deducted. The rationale for introducing this levy was explained in the Memorandum to the Finance Bill, 2016 as follows:

Amendment by Finance Act, 2020

The scope of EL has further been enhanced by Finance Act, 2020, to include e-commerce operators. E-commerce operator is defined as a non-resident that owns, operates, or manages a digital or electronic facility or platform for online sale of goods or the online provision of services. Thus, all e-commerce operators meeting the prescribed conditions will be required to pay a 2% equalisation levy on consideration received or receivable.

The EL provisions relating to e-commerce operators are contained in section 165A reads as below:

Section 164 further contains definition of various terms used herein. Some of the important definitions captured therein are reproduced as below:

Some of the concerns relating to interpretation of various terms are:

• Double taxation & credit denial: EL provisions were kept under a separate chapter implying that the credit for the same will not be available in the home country of the e-commerce operators. Thus, this will lead to double taxation and global MNE groups may be inclined to pass on this additional cost to consumers either wholly or partly;
• Ambiguity in key definitions: Definitions of certain terms were not very clear leading to various interpretation. For e.g., the definition of the term “e-commerce” operator was defined in a manner to even include some of the services such as IT support, database access, etc. provided by one non-resident group company to another group company in India. Similarly, the term “online” was given very wide connotation to include any facility or service or benefit or access obtained through internet or any other form of digital or telecommunications network.
• Royalty/FTS overlap: It was not specifically mentioned, that income earned by non-resident e-commerce operator in the nature of royalty/fee for technical services will continue to be governed by existing provisions or will be subject to EL.

More clarity is required around the nature of transactions proposed to be covered by EL provisions.

Amendments Proposed by the Finance Bill 2021

Recognising the issues mentioned above the government on Feb 01, 2021 vide Finance Bill, 2021 has provided clarity on some of the aspects as mentioned above. Some of the major amendments proposed include:

Concerns to be addressed

It goes without saying that EL is an additional tax burden on the companies and this coupled with the fact that it is intended to be applied as a unilateral measure where corresponding relief/tax credit is not available in the home country may give rise to double taxation, unless a suitable clarification is provided in the Income-tax Act, 1961.

EL is supposed to be a temporary measure until an approach which has global consensus is developed by OECD. However, the concern amongst business remains as to what would happen in case where a globally accepted approach is not possible or there are considerable delays in formulating such an approach.

While the clarification provided by government through Finance Bill 2021 will certainly help businesses in evaluating the applicability of these provisions on their businesses there are still a lot of factors surrounding the provisions which needs to be addressed, such as:

1. Double taxation & absence of treaty protection: The major issue with EL which has not been addressed so far is the double taxation caused by it. As mentioned earlier EL is outside the scope of Income Tax Act 1961 thus treaty benefits with respect to the same are not available.
2. Excessively wide scope: Further, EL provisions in its present shape seems to have a very vide applicability and cover almost all digital transactions.
3. Heavy compliance & PAN requirements: EL would impose additional compliance burden on non-resident e-commerce operators. The EL provisions relating to e-commerce operators cast liability on non-resident operators to pay the amount of EL to government within stipulated time. This also requires the e-commerce operator to obtain Permanent Account Number (PAN) in India as well as comply with other procedural requirements.
4. Consumer cost pass-through: From consumer perspective, there is no provision restraining large e-commerce operator to shift burden of EL on to the customers making the transactions costlier for the Indian taxpayers.

The concern of the tax department in protecting the tax base in respect of digital transactions is genuine and they are within their rights to look for the possible methodologies for taxing such transactions. India, similar to many other tax jurisdictions, has adopted unilateral measures to protect their tax base and this is supposed to continue till global community does not talk in one voice to find the concerns regarding taxation of digital economy. Given this scenario, Indian authorities may take into consideration the Achilles heel of business to find fruitful remedies to curb double taxation, increased burden of compliance and transaction costs.