Taxation On Digital Companies In India And Scope Of Equalisation Levy
After the liberalisation, territorial boundaries were no longer a restriction for businesses and enterprises, so an international market for various kinds of products and services emerged. Businesses have come ahead in the economic sphere to carry out trade activities across countries without having any kind of physical presence. This has provided the non-resident digital businesses with an unfair advantage, to generate enormous profits without having to pay taxes. [i] To combat this issue, the Indian government introduced an equalisation levy on all non-digital businesses- residents of the country.
Digital economy taxation has become a problematic challenge for regulators because of its inherent qualities such as flexibility, data dependence and network effects that help them defy existing tax principles. The Base Erosion and Profit Shifting Project (BEPS) initiative of The Organization for Economic Cooperation and Development (OECD) has recognised this fundamental issue and placed the problems of digital taxation in Action Plan 1. The BEPS initiative is a groundbreaking change in international taxation regime. However, the comprehensive mechanism had failed to find consensus on implementing a single structure for taxing the digital economy in 2014 under Action Plan 1 and had delayed the process until 2020. Meanwhile, under Action Plan-I, three measures were suggested for regulators to tax internet-based business models-I the test of significant economic presence (SEP), (ii) withholding tax on digital transactions, and (iii) Equalisation levy.
AMENDMENTS TO THE TAX FRAMEWORK
In the year 2018, the legislation introduced provisions for Significant Economic Presence (SEP, also the nexus rule). If a non-resident has a SEP in India, he will establish a taxable presence in India. However, the revenue threshold regarding specified transactions as well as the threshold for the number of users had not yet been mandated to determine SEP[ii]. Provided that the G20-OECD study is scheduled in December 2020, the applicability of the SEP provisions has been prolonged until the 2021-22 financial year. With the recent amendment, SEP has expanded to include the following-:
a) The advertisements which target a customer residing in India or who accesses advertisement through internet protocol (IP) address located in India.
b) Sale of data collected from a person residing in India or who uses an IP address located in India.
c) Sale of goods/services using data collected from a person residing in India or who uses IP address located in India.[iii]
The deferment of SEP provisions is a positive change, allowing companies more time to determine whether there are significant tax risks based on the factual model and consider minimising those risks by developing their business model.
An Equalisation levy of six per cent was imposed in the year 2016 with consideration of dues on a non-resident for digital advertising, the provision of digital advertising space or other support for online advertising purposes. Now, with the amendment, the applicability of the equalisation levy is expanded to a proper consideration on e-commerce supply/services from a non-resident, e-commerce operators. For this purpose, Section 164A of Finance Act, 2016 was amended as follows -:
(a) ‘e-commerce operator’ is a person who owns, operates or manages a digital or electronic facility or platform for the online sale of goods/provision of services and
(b) ‘e-commerce supply or services’ means an online sale of goods owned by the e-commerce operator, online provision of services provided by the e-commerce operator or sale/services facilitated by the e-commerce operator.[iv]
An equalisation levy of 2% would be applicable on consideration receivable by the e-commerce operator for supply or services or facilitation of supply or service to:
- A person resident in India
- Non-resident under specified circumstances such as through sale of data collected from a person resident in India
- Person who buys goods or services through an IP address located in India. [v]
CHALLENGES AHEAD
The amended equalisation levy defines a broad concept of ‘e-commerce operator’ and ‘e-commerce supply or operation.’ As technology advances, most business organisations are now using digital or online channels to place orders for products supplies or to provide services. Also, such regular supply of goods or services, whether bought or made using standard digital /online modes, may be brought under the purview of equalisation levy. This does not seem to be the intention of the suggestion made by OECD during BEPS Action Plan 1, in specific for services that might be subject to source rule tax.
It is essential to take note that amendments related to the equalisation levy did not form part of the Finance Bill, 2020; and were adopted and passed directly by the Indian Parliament during the lockdown scenario without much discussion. Due to the broad language used in the amendment, there tend to be ambiguity and opens the path for numerous open questions.
In addition to the applicability of the equalisation levy on the regular supply of goods or services using modern digital modes, clarification will be needed on the applicability of the equalisation levy when a specific income is already subject to tax at higher levels under the Indian Income Tax Act since the purpose of implementing this new levy is not to reduce the tax rate(s).[vi] Relevant changes have been made to exclude income received on or after April 1, 2021, subject to an equalisation levy, under the Income-Tax Law. It is necessary to note that the equalisation levy is effective from April 1, 2020, resulting in a disparity between the applicability date of the equalisation levy and the exemption of such income from income tax.
It is essential to analyse the applicability and effect of this new levy for non-resident companies with Indian parties. In particular, where high-value transactions are involved, the option of approaching the Central Board of Direct Tax to provide upfront clarification for an individual case may also be explored.
IMPLICATIONS
The amendments brought a surge of positive implications for India. Companies with no physical presence in India, but with a digital presence, previously held away from the tax system, have now been brought within the limits of local tax legislation. Companies with no physical presence in India, yet receiving Indian audience revenue would no longer be able to circumvent taxes by shifting their offices to tax havens.[vii]
Besides, digital taxation provides a level playing field for both domestic and international enterprises that would otherwise have gained an unfair competitive advantage over small and medium-sized businesses and startups. In particular, the e-commerce industry is projected to rise to $200 billion in the next five years, and taking a reasonable piece of the pie would increase Indian government revenues significantly.
Also, for most tech giants like Google, Facebook, Amazon, to name a few, the introduction of digital taxes will strain trade relationships with countries, particularly the US. This taxation framework is likely to adversely affect startups during their preliminary stages of growth and expansion. More so, higher taxes are likely to slow development and corporations will most likely pass part of this tax onto end consumers and sellers.[viii]
CONCLUSION
The proposed levy tends to suffer from certain drawbacks, both the standpoint of policy and the drafting. The ambiguities in drafting can be dealt with, in future by the Central Board of Direct Taxes rules, forms or clarifications. Regarding issues related to policy, it faced a fair share of criticism from the international community when India implemented the levy in 2016, as resorting to unilateral steps would distort the digital economy.
However, various jurisdictions have come up with their domestic tax following the efforts of India. There is indeed a considerable prospect of tax revenue from digital services; thus, no country can reasonably be expected not to exercise its sovereign right to tax. It is essentially a transfer of capital from one nation to another to compensate for such revenue.
[i] Impact of Equalisation Levy on Digital Markets
https://taxguru.in/income-tax/impact-equalisation-levy-digital-markets.html
[ii] India: Amending the tax framework to move towards a digital economy https://www.internationaltaxreview.com/article/b1l2slw8nq6wzh/india-amending-the-tax-framework-to-move-towards-a-digital-economy
[iii] Section 165A (3), Finance Act, 2016 (as amended by Finance Act, 2020)
[iv] Section 164A (1), Finance Act, 2016 (as amended by Finance Act, 2020)
[v] Section 165A(1), Finance Act, 2016 (as amended by Finance Act, 2020)
[vi] Taxation In A Digital Economy: Review Of Recent Developments In India
https://www.mondaq.com/india/tax-authorities/929104/taxation-in-a-digital-economy-review-of-recent-developments-in-india
[vii] Here’s All You Need To Know About Indian Digital Tax
https://inc42.com/resources/heres-all-you-need-to-know-about-indian-digital-tax/
[viii] Id.
(Authored by Anand S, Student of Second Semester, National University of Advanced Legal Studies, Kochi)
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