Digital Technology (DigiTech) & E-commerce Taxation
Indian e-commerce and DigiTech industry have been grown to a new height in the past decade. We have seen exponential rise in the way people look at business and the modus operandi of managing a business. From high investments in space and layouts, people have diverted to high investments and expenditure in technology and logistics. This is the reason why logistics demand has also equally risen along with e-commerce. From what we understand that in todays date, anyone can do business and reach out to the end consumer from anywhere in the world. With this type of structure since the economic presence is possible for a particular organisation without having a physical presence in India, it became very important for the revenue departments to tweak their provisions to get these e-commerce and DigiTech giants under their purview. With that spirit, we have seen amendment and changes coming in the Income-tax Act, 1961 and also in Goods & Service tax Law in India.
Digital Technology (DigiTech)
Income tax
Equalisation levy on online advertisements on digital platforms
Business may be conducted in digital domain without regard to national boundaries. This may dissolve the link between an income-producing activity and a specific location. To tackle taxation issues in transaction conducted in cyber space, equalisation levy was imposed. Equalisation levy had come in force from 1 June 2016 under section 165 if Finance Act 2016. Equalisation levy is required to be charged at the rate of 6 percent of the amount of consideration for specified services received or receivable by a non-resident from a person resident in India, if such amount paid/ payable is more than 1 lac in a particular previous year.
Specified services for this purpose mean online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf.
Where a person resident in India who is carrying on business or profession in India avails the specified services as mentioned above, then such person shall deduct equalisation levy from the amount paid or payable to the non-resident in respect of such specified services at 6 percent on such amount paid/ payable.
Example
The most common example to consider in this situation is of payments made to Google & Facebook for online advertisement where such payments are made to Foreign arm of Google or Foreign arm of Facebook. Since these are purely considered as advertisement in digital space and would be considered as online advertisement, an Indian person carrying out business or profession in India and availing these services of non-resident entities (Google & Facebook) would result to deduction of equalisation levy of 6 percent.
Grossing up
Now the most important part in this entire scenario which most of the Indian businesses face is that such platforms which facilitate online advertisement, take such amounts in advance and the entire amount is debited by registering your cards/ wallets online. These platforms do not allow lower payments and therefore deduction and payment to these platforms becomes almost impossible. In that scenario it has been categorically stated that where in case the payer has not deducted/ failed to deduct such levy from the amount paid/ payable, yet the amount is liable to be paid. In such situation, the amount will have to be grossed up along with the levy and the liability of the levy will have to be discharged by the service recipient.
Compliance, interest and penal provisions
Payment: The equalisation levy collected is required to be paid by 7th day of the month following the month in which the equalisation levy has been collected.
Furnishing of statement: Deductor shall furnish a statement electronically in Form No. 1 in respect of all specified service entered into during the financial year on or before June 30 immediately following the respective financial year.
Interest: Failure to make the payment would lead to interest payment at simple interest method of 1 percent for every month (or part of the month) upto the month of payment.
Penalty: where there has been a failure to deduct equalisation levy (wholly or partly), penalty equal to equalisation levy is required to be paid. Further, failure to furnish the statement in Form No. 1 as specified above would make Deductor liable for INR 100 per day of default.
Disallowance of expense u/s 40(a)(ib)
Any consideration paid or payable to a non-resident for a specified service (mentioned above) on which equalisation levy is deductible under the provisions of Chapter VIII of the Finance Act, 2016 and such levy has not been deducted or after deduction has not been paid on or before the due date of filing the return of income is disallowable u/s 40(a)(ib) of the Income-tax Act, 1961. Further, if such equalisation levy has been deducted in any subsequent year or has been deducted during the previous year but paid after the due date of filing return of income (u/s 139(1) of the Income-tax Act, 1961), then such expense shall be allowed as deduction in computing the income of the previous year in which such levy has actually been paid.
Income tax benefits
The Income-tax law has been amended to provide for exemption arising from any income arising from any e-commerce supply or services made or provided or facilitated, and chargeable to equalization levy as explained above.
Goods & Service tax
GST on RCM basis on import of service
As per Section 2(11) of IGST Act, import of service means supply of service, where:
1. Supplier of service is located outside India
2. Recipient of Service is located in India
3. The place of supply of service is in India.
Applicability of GST on Import of Service on Reverse Charge Mechanism (RCM) basis:
In terms of Notification no.10/2017-IT(R) dtd 28.06.2017, one of the notified category on which GST is applicable under RCM is “any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient”.
IGST liability under RCM in case of Import of service has to be paid in cash/bank. GST ITC to the extent of IGST paid can be availed and utilized in the same month subject to ITC eligibility.
Therefore, considering the above, the import of services from in the form of online advertisements on digital platforms (like Google/ Facebook (Foreign entities)) would be liable to GST on RCM basis at 18 percent.
E-commerce
Income-tax
Equalisation levy on E-commerce operators
The concept of equalisation levy was introduced by Finance Act 2016 to tax certain services and recently through its amendment in the Finance Act 2020, its scope has been enhanced to cover further transactions. This levy is not through the Income-tax Act, 1961, but through the Finance Act 2016. Through the amendment made through Finance Act, 2020, equalisation levy of 2 percent has been imposed on the e-commerce operators on the amount of consideration received or receivable for e-commerce supply or services made or provided or facilitated by it on or after 1st day of April 2020.
Having understood the above, it becomes very important to understand the scope of e-commerce supply or service and the scope of e-commerce operators, which is covered by this amendment and therefore it is important to understand how the Finance Act 2020 defines these terms, which has been stated as under:
“e-commerce supply or services” means—
(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);]
Therefore, the scope above is wide to cover the goods owned or facilitated by the e-commerce operator. Therefore, if an e-commerce operator sells its owned goods on the e-comm platform, still the same will fall within the purview of the equalisation levy provisions introduced. However, it is imperative to understand whether who all would be covered within the ambit of e-commerce operator as per the amendments made by Finance Act, 2020.
“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
From the above, it is clear that the Finance Act, 2020 intends to cover only non-residents who own, operates or manages digital or electronic facility/ platform.
Example: E-commerce giants who are operating from their home countries or countries outside India, like certain hotel accommodation reservation platforms, etc. will have to pay this levy for the bookings made through their portal online.
The difference between the provisions of equalisation levy in case of online digital advertisement services and in case of levy on such e-commerce operators is that in case of former, the deduction has to be done by the service recipient whereas in case of later, the levy has to be charged by the e-comm operator and recover from the customer and pay to the Government Treasury.
Exclusions
1. where the e-commerce operator has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment
2. where the equalisation levy is leviable on online advertisement and related activities
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 million during the financial year.
Compliances, interest & penalty
The equalization levy is to be paid by the non-resident e-commerce operator quarterly within the following due dates:
| Date of ending of the quarter | Due date |
| 30 June | 7 July |
| 30 September | 7 October |
| 31 December | 7 January |
| 31 March | 31 March |
Interest: Delayed payment carries simple interest at the rate of 1 percent for every month or part of a month
Penalty: Failure to pay equalisation levy attracts penalty equal to the amount of equalisation levy
Income-tax benefits
The Income-tax law has been amended to provide for exemption arising from any income arising from any e-commerce supply or services made or provided or facilitated, and chargeable to equalization levy as explained above.
Impact analysis
Previously, the government had introduced the concept of “Significant Economic Benefits” in the definition of “Business Connection” which specifically aimed towards getting the non-resident entities operating in India through digital means under the tax regime. However, the treaties benefitted the respective non-residents as there was no such provision under the PE articles of the treaties. Having said that, the Government of India has now introduced this concept of taxing such e-commerce companies under equalization levy which will have a significant impact on the non-resident supplying goods and services digitally. This is so because the definition of ‘e-commerce operators’ and ‘e-commerce supply or services’ are very wide in scope. Therefore, taxpayers may now need to evaluate various scenarios to understand the implication under this. For instance, even where the parent company provides any IT services to its subsidiary company, such provisions will have to be looked into from applicability perspective.
More importantly, it is also pertinent to note that supply of goods or service from one non-resident to other also may attract these provisions (where there is some nexus with India). It is important to note that the provisions of equalization levy are not part of Income-tax and therefore benefit of treaty may not be available in relation to such levy. Additional guidance on this subject is awaited from the Government on these provisions.
TDS u/s 194-O for E-commerce operators
The Finance Act 2020 has inserted a new section 194-O in the Income-tax Act, 1961 where an e-commerce operator facilitating the sale of goods or provision of service of an e-commerce participant through a digital or electronic facility or platform of such e-commerce operator, then such e-commerce operator shall at the time of payment or credit of amount of sale or service or both to the e-commerce participant, whichever is earlier, deduct tax at 1 percent of the gross amount of such sales or service or both.
Therefore, in order to understand the applicability of the provisions of this section, it is ideal to first understand as to who would be considered as an e-commerce operator and who would be considered as an e-commerce participant:
“e-commerce operator” means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce;
“e-commerce participant” means a person resident in India selling goods or providing services or both, including digital products, through digital or electronic facility or platform for electronic commerce;
“electronic commerce” means the supply of goods or services or both, including digital products, over digital or electronic network;
Therefore, any person resident in India sells goods or providing services or both (including digital products) through digital or electronic facility or platform, then such person would be eligible to receive such receipts from sales occurred through such platform or electronic facility after deduction of 1 percent as TDS by such operator who owns, operates or manages such digital or electronic facility. This amount so deducted will have to be deposited by such e-comm operator with the Credit of Central Government and the e-comm participant will claim credit of the same in its ITR.
Tax not deductible
Tax is not deductible under the said section if the e-comm participant is an Individual or HUF and the gross amount of such sale of goods/ services through the said e-comm operator during the previous year does not exceed Rs. 5 Lac and such e-comm participant has furnished his PAN or Aadhar to the e-comm operator.
Therefore, it is important to note that:
- An e-comm operator u/s 194-O can be a resident or a non-resident
- An e-comm participant u/s 194-O has to be a resident person
- There can be a situation where e-comm operator will have to comply with both Equalization Levy as well as provisions of deductions u/s 194-O
- The provisions of this section are so vide that it may also include operators selling financial products on the digital platform for eg. Mutual fund distributors, insurance policy aggregators, etc.
- Board may have to come out with a clarification where it lays down the inclusions and exclusions of this provision to remove difficulties
Goods & Service tax
TCS for E-commerce operators
Electronic Commerce has been defined in Sec. 2(44) of the CGST Act, 2017 to mean the supply of goods or services or both, including digital products over digital or electronic network.
Electronic Commerce Operator has been defined in Sec. 2(45) of the CGST Act, 2017 to mean any person who owns, operates or manages digital or electronic facility or platform for electronic commerce.
As per Section 24(x) of the CGST Act, 2017 the benefit of threshold exemption is not available to e-commerce operators and they are liable to be registered irrespective of the value of supply made by them.
Tax collections
The e-commerce operator is required to collect an amount at the rate of one percent (0.5% CGST + 0.5% SGST) of the net value of taxable supplies made through it, where the consideration with respect to such supplies is to be collected by such operator. The amount so collected is called as Tax Collection at Source (TCS). An e-commerce company is required to collect tax only on the net value of taxable supplies. In other words, the value of supplies which are returned are adjusted in the aggregate value of taxable supplies.
Credit of TCS
The amount of TCS paid by the operator to the government will be reflected in the GST returns of the actual registered supplier (on whose account such collection has been made) on the basis of the statement filed by the e-comm operator. The same can be used at the time of discharge of tax liability in respect of the supplies made by the actual supplier.
Disclaimer: The views expressed in this note are the personal view of the writer and should not be considered as an opinion by any manner. For deciding any implication, it is always advised that you approach a consultant and obtain a professional advice.
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