Decoding Equalisation Levy 2.0 - Tax on Digital Economy

[Manisha Kabra]

Introduction

Digital presence of the multinational enterprises has been an emerging issue amongst the global players all over the world. It was realized that the traditional definition of Permanent Establishment (PE) is not equipped to deal with taxation of the businesses without any physical presence. While there was an urgent need to address such a prominent issue and that the Organization for Economic Co-operation and Development (OECD) has been working towards developing consensus to address challenges arising from digitalization of the economy, several countries including India have introduced unilateral measures to tax the digital economy.

Taking a cue from the Base Erosion and Profit Shifting (BEPS) Action Plan, India introduced the Equalisation Levy in the year 2016 to tax the transactions arising in a digital economy. Accordingly, the Equalisation Levy at the rate of 6% was introduced on non-residents engaged in online advertisements and related activities.

Now, the Finance Act 2020 has widened the scope of Equalisation Levy to include within its ambit e-commerce supply of goods and services by an e-commerce operator and is effective from 1 April, 2020.

In this article, I have tried to analyze the provisions of the Equalisation Levy along with the issues that emerge in practical implementation of the same.

Key Highlights

A. Levy on E-commerce transactions

The Equalisation levy is applicable on the consideration received or receivable by an ‘e-commerce operator’ from ‘e-commerce supply or services’ made or provided or facilitated by it –

• To a person resident in India; or
• To a non-resident where the –
  • • Sale of advertisement targets an Indian customer or a customer who access the advertisement through an IP address located in India; and
    • Sale of data, collected from an Indian resident or from a person who uses an IP address located in India; or

• To a person who buys such goods or services, or both, using an IP address located in India.

‘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’ means –

1. Online sale of goods owned by the e-commerce operator; or
2. Online provision of services provided by the e-commerce operator; or
3. Online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
4. Any combination of the above.

Hence, the levy seeks to capture online sale of any goods or provision of any services provided by or through a non-resident e-commerce operator.

From the perusal of the above provisions, certain points emerge for consideration, listed hereunder -

1. Terms such as “electronic”, “digital”, “facility”, “customer” have not been defined under the levy, thereby leading to ambiguity and multiple interpretations. 

2. The levy intends to capture a non-resident who manages a platform for online sale of goods or provision of services.

Let us understand with the help of an example. Say an Indian customer places an order for certain goods online, i.e, through the platform provided or facilitated by a non-resident e-commerce operator. The vendor of goods is also a non-resident who uses such facility or platform provided by the non-resident operator, to display and sell his goods.

Indian Customer ------------ Online platform by NR -------------Third Party Vendor (NR)

                                            e-commerce operator

Here, the non-resident operator only acts as a facilitator between the vendor and the customer base located in India and would be earning a certain percentage of commission or the facilitation fee.

The question arises as to whether the 2 percent Equalisation Levy would be on the total consideration of the goods/ services traded on the online platform or only the commission or facilitation fee earned by the operator for providing the online platform.

Going by the provisions how they are worded, it appears that the entire consideration would be taxed and not just the commission or the facilitation fee. Thus, the Levy seeks to tax the facilitation for supply at the same rate as the supply of goods.

3. Whether the Levy would also be attracted on the customer who merely views the advertisement online but does not buy any goods or services or only when the customer purchases or avails a supply which was being advertised?

Considering the language of the provisions, it appears that the Levy would be attracted even in the case where the customer merely views the advertisement as the Levy gets attracted once the advertisement intends to target an Indian customer. However, there would be practical difficulty in computing the amount of consideration in such cases. Clarification would be required on this aspect.

4. There is no clarity on the calculation of levy considering the adjustments pertaining to sales return, refunds, cashback, etc. as these are really not factored under the Scheme of Levy.

While there is no clarity on the various issues, considering the language how the law is worded, one has to go by the best interpretation in this matter.

B. Exclusions from the Equalisation Levy

Equalisation Levy shall not be charged in the following cases:

1. where the e-commerce operator has a PE in India and such e-commerce supply or services is effectively connected with such PE;
2. where the Equalisation Levy is leviable on online advertisements and related activities at the rate of 6 percent; or
3. sales, turnover or gross receipts of the e-commerce operator from the e-commerce supply or services made or provided or facilitated is less than INR 20 millions during the previous year.

C. Compliance and consequences in case of non-compliance

Payment of Levy

The earlier Levy of 2016 was required to be deducted and paid by the resident Indian i.e, the recipient of such services. Generally, in such cases the non-resident was only charging the levy and it was recovered from the Indian residents who were availing such services. Hence, one could say that practically in majority of the cases, there was no loss of revenue to the non-residents.

Unlike the earlier Levy, the new Levy 2.0 is to be paid by the non-resident e-commerce operator. The non-resident e-commerce operator is require to deposit the Levy to the credit of the Government quarterly within the following due dates.

Quarter ending	Due date
30th June	7th July
30th September	7th October
31st December	7th January
31st March	31st March

Consequences for delay in payment or non- payment

Any delay in payment would entail chargeability of simple interest at the rate of 1 percent for every month or part of month.

An e-commerce operator who fails to deduct or fails to pay the whole or any part of the Equalisation Levy shall be liable to penalty equal to the amount of the Equalisation Levy.

Annual statement

The e-commerce operator is also required to submit an annual statement by 30 June of the year following the year ending on 31^st March.

Consequences for non- compliance

Failure in filing the annual statement within the specified due date may invite an additional penalty of INR 100/- for each day of continuing default.

D. Exemption from Income Tax

Income tax law has been amended to provide for exemption of any income arising from any e-commerce supply or services made or provided or facilitated on or after 1^st April 2021 and chargeable to the Equalisation Levy. Section 10(50) of the Income Tax Act, 1961 provides for such an exemption from the income tax.

However, such an exemption is available only from April 2021 whereas the Equalisation Levy has become applicable from 1^st April 2020. Accordingly, it appears that for the goods and services sold from April 2020 to March 2021, the non-resident taxpayer is liable to double taxation i.e, under the normal provisions of the Act and also the Equalisation Levy.  There could be a situation where the non-resident taxpayer does not have a PE in India but earning income in the nature of Royalty or Fees for technical services. Here, in such cases, the non-resident would end up paying taxes in India once under the normal provisions of the Act (and DTAA provisions, whichever is more beneficial) and also on account of the Equalisation Levy.

The question arises as to why such a one year window between the applicability of the Levy and that of exemption under the Income Tax Act. There could be a possibility that the Government intends to examine the operation of the Scheme of the Equalisation levy for a year, after being rolled out to check on its implementation parallel to the present stream of revenue. However, only time will tell us if the provisions in this respect are clarified by the Government.

E. Equalisation Levy – a levy under a separate provision of law

The tax treaties entered into by India majorly cover, within its scope, the taxes which are identical or are of substantially similar taxes. The Equalisation Levy is not a tax under the Income Tax Act but a Levy under the separate provision of the Law and hence, the non- resident taxpayer might not be eligible to claim credit of such a levy paid in India against the tax liability in the country of his residence. This would result in double taxation in their hands as would be taxed in India as well as in their country of residence thereby leading to increase in cost for the e-commerce operators.

F. Impact of the Equalisation Levy and difficulty in implementation

To conclude, the concept and the subject of the Equalisation Levy and taxation of digital economy is ever – evolving. While the Levy has been made applicable from 1 April 2020, there are various aspects that require clarifications.

The definition of the terms “e-commerce operator” and “e-commerce supply or services” are far and wide in scope. It appears that not only B2B but B2C transactions are also covered under the Scheme of the Levy, resulting into increased compliance burden on such small and medium e-commerce operators.

Also, businesses would need to have proper system and infrastructure to deal with the technological challenges arising in locating IP address of the Indian customers. The non- resident e-commerce operators have to obtain PAN in India and thereby make payment of the Levy. This 2020 Levy might result in increase in the consumption cost of the digital services. 

Further, the Equalisation Levy would not apply when the e-commerce operator has a PE in India. However, every other day, we see litigation on the point where the Revenue alleges that the non-resident taxpayer has a PE in India whereas the taxpayer challenges that he does not have one in India. In such cases, non-resident taxpayer would find it difficult to come to a conclusion as to whether or not, it is liable to pay 2 percent Equalisation Levy.

Similarly, when a payment to non- resident e-commerce operator is subjected to the Equalisation Levy, it would not be liable for withholding tax liability. To comply with the withholding tax compliance while making payment to non-residents, the residents obtain a NO PE declaration to check on and comfort themselves from the withholding tax perspective.

The question arises that whether a similar declaration would be enough for the residents to check on the withholding tax compliance when it comes to the Equalisation Levy or need to go beyond that so as to avoid any default on their part. 

The residents would need to evaluate on the kind of documentation they should take to ensure necessary compliance. Residents may also obtain an appropriate indemnities from the e-commerce operator to protect themselves from any kind of default.

Hence, clarifications and interpretations are needed on various aspects for practical operation and effective implementation of the Levy.

Impact worldwide

With the introduction of Equalisation Levy by India and also by several other European nations, concerns have been raised by the businesses worldwide over such unilateral measures adopted by these countries without waiting for a global consensus, resulting in increased tax costs. Especially, developed countries like US has expressed representations on OECD Pillar One, Offices of the US Trade Representative has even initiated investigation on digital taxes.

Though the issue of digital presence was essential to address and has been addressed through the charge of the Equalisation Levy in India, however, it might not be an easy ride but have far reaching implications and litigations worldwide.