India’s Digital Tax: Widened scope of equalization levy

published on 20 April 2020 | reading time approx. 4 minutes

Digitalization has changed the way a business operates. With the ability to do business in any market without having a physical presence, challenge of allocation of taxing rights of income from a market has become a burning issue. Reaching out to a consensus on approach for taxing the digital transaction has proved to be one of the most challenging task for the Organisation for Economic Co-operation and Development (OECD). No concrete approach under the Base Erosion and Profit Shifting (BEPS) Action Plan 1 could be provided for taxing digital transactions. As an interim measure, three options viz. (i) significant economic presence; (ii) withholding tax on digital transactions; and (iii) equalisation levy, were suggested which a country may choose to adopt in their domestic tax laws subject to their bilateral tax treaties.

India has been a frontrunner in adopting unilateral digital tax framework. In 2016, India introduced equalisation levy of 6 per cent on digital/online advertisement and related services. From April 1 2020, India has widened the scope of equalisation levy to include “e-commerce supply or services” provided by e-commerce operators, under the purview of the digital tax, a.k.a. equalisation levy. Prima-facie, the new scope appears to be similar to Digital Service Tax announced by the European Union. However, wording of few important terms in the expanded scope of equalisation levy creates challenges for all non-resident entities supplying goods or services from abroad to Indian parties using digital or electronic platforms.

Salient features of equalisation levy on e-commerce operators

Particulars	Comments
Applicability	Non-resident “e-commerce operators” providing “e-commerce supply or services” to: a person resident in India; or a non-resident in ‘specified circumstances’; or a person who buys such goods or services or both using Internet Protocol (IP) address located in India. ‘Specified circumstances’ in the above context have been defined to mean - sale of advertisement, which targets a customer, who is resident in India or a customer who has accessed the advertisement through IP address located in India; and sale of data, collected from a person who is resident in India or from a person who uses IP address located in India.
Meaning of e-commerce operator	Who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both
Meaning of e-commerce supply or services	Online sales 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 the above.
Specific exclusions	Where the e-commerce operator has a permanent establishment in India and such e-commerce transactions are effectively connected with such permanent establishment; Where the equalisation levy is already falling within the ambit of digital or online advertisement; or Sales, turnover or gross receipts, of the e-commerce operator is less than INR 20 million (~ € 250,000) in the financial year (1 April to 31 March).
Compliance requirements	Non-resident e-commerce operator is required to pay 2 per cent equalisation levy on value of e-commerce supply or service on quarterly basis and is required to file annual statement in India. Due date for 1st compliance/payment for the period of April 1, 2020 to June 30, 2020 for the equalisation levy is July 7, 2020. Failure to pay equalisation levy or failure to undertake the required compliance attracts interest, penalty and prosecution provisions on non-resident e-commerce operators.
Tax treaty benefits	Equalisation levy is said to be a separate charge (levy) created in the Finance Act, 2016 and it does not form part of the Indian Income-tax Act, 1961. Senior tax officials on various forums has stated that tax treaty benefit will not be available on equalization levy.

Our Comments

Amended equalisation levy provides for wide definition of ‘e-commerce operator’ and ‘e-commerce supply or service’. With the evolution of technology, most of the business groups are already using digital or electronic platforms to place orders for supplies of goods or to render services. It could bring even such regular supply of goods or services, either purchased or rendered using regular electronic communication modes, under equalisation levy purview. This does not seem to be the intent of the suggestion made by OECD during BEPS Action Plan 1, especially for services that could be subject to tax on source rule basis.

It is important to note that equalisation levy related amendments did not form part of Finance Bill, 2020 presented on February 1, 2020; and were directly introduced and passed by Indian Parliament on March 27, 2020 during lockdown situation without much discussion. There appear to be various open issues and confusion created due to broad language used in the amendment.

Apart from applicability on equalisation levy on regular supply of goods or services using modern digital modes, clarity will be needed on the applicability of equalisation levy when a particular income is already subject to tax at higher rates under the Indian Income-tax Act, as reduction in the tax rate(s) is not the intention to introduce this new levy. Specific amendment under the Income-tax law have been made to exempt the income earned on or after April 1, 2021 which is subject to equalisation levy. It is pertinent to note that equalisation levy is applicable from April 1, 2020 leading to a mismatch between the date of applicability of equalisation levy and exemption of such income from income-tax.

Procedures related to sales return or credit note also requires proper guidance. One could therefore expect some clarification and FAQs in due course on the new scope of equalisation levy.

For non-resident companies having business operations with Indian parties, it is important to analyse the applicability and impact of this new charge. The option of approaching the Central Board of Direct Tax (apex policy making body for direct tax in India) to provide upfront clarifications for an individual case can also be explored especially where high value transactions are involved.