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In September 2013, OECD and G20 countries adopted a 15-point Action Plan to address Base Erosion and Profit Shifting (BEPS).

The Action Plan identified 15 actions along three key pillars:

-Establishing international coherence of corporate income taxation

-Restoring the full effects and benefits of international standards

-Ensuring transparency while promoting increased certainty and predictability.

Action 1 of the BEPS Action Plan deals with tax challenges of the Digital Economy. In the Action 1 Final Report, titled ‘Addressing the Tax Challenges of the Digital Economy, Action 1 – 2015 Final Report’ (Action 1 Final Report), OECD mentions about the creation of The Tax Force on the Digital Economy (TFDE), a subsidiary body of the Committee on Fiscal Affairs (CFA). TFDE analysed several options to address the tax challenges raised by the digital economy. Three of them were as follows:

  • A new nexus in the form of a significant economic presence
  • A withholding tax on certain types of digital transactions, and
  • An equalization levy.

It is to be noted that OECD did not recommend any of the options that were analyzed by the TFDE, but stated that the “countries could, however, introduce any of the options in their domestic laws as additional safeguards against BEPS, provided they respect existing treaty obligations, or in their bilateral tax treaties”.


The Committee on taxation of E-Commerce (Committee) was constituted by the Central Board of Direct Taxes (CBDT) to examine the business models for e-commerce, identify the direct tax issues in relation to e-commerce transactions and suggest an approach to deal with these issues. In February 2016, Committee published the Report titled ‘Proposal for Equalization Levy on Specified Transactions’ (EL Report). The Report covers several aspects of the taxation of e-commerce in the context of the final report for Action 1 of the OECD BEPS Project, including the committee’s recommendations for an EL, which the government included in the 2016-2017 Union Budget.

The Committee analysed the options that were identified in the Action 1 Final Report and noted that the third option i.e. an Equalisation Levy was simpler in comparison to the other two options and it could be adopted under the domestic laws without amending a large number of tax treaties.


Equalisation Levy was introduced via the Finance Act 2016 with effect from 1st June 2016. The EL was levied at 6% on consideration received or receivable by a non-resident for specified services from (i) any person resident in India carrying on business or profession in India or (ii) a non-resident having a PE in India.

Specified Services was defined to 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.

The intended purpose to levy EL was to tax the revenue generated by non-resident companies like Google and Facebook, in India. These companies were making significant earnings from India, but they didn’t satisfy the criteria of Permanent Establishment.

EL or “Google Tax”, was also intended to level the playing field between Indian and foreign e-commerce players

At the time, several start-ups and other enterprises were against the levy as the burden of this levy would have fallen on them.

India was one of the first nations to impose a unilateral levy on online advertisements. In 2019, France introduced a digital services tax (DST) at a rate of 3%. In February 2020, the Spanish Government has approved the legislation introducing a 3% tax on certain digital services. The UK also has a DST, effective from 1st April 2020, at a rate of 2%.

However, the scope of the EL has been expanded in 2020.


The changes brought forward by the Finance Act 2020 concerning EL surprised everyone. These changes did not form part of the original Union Budget 2020-21 proposals. Finance Act 2020 amended Finance Act, 2016 and introduced a new levy of 2%.

The EL 1.0 covered B2B transactions only while EL 2.0 covers both B2B and B2C transactions.

The new levy is on the amount of consideration received or receivable by an e-commerce operator from e-commerce supply or service made or provided or facilitated by it –

1. To a person resident in India or

2. to a non-resident in the following circumstances:

    • sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India; and
    • sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India
  • to a person who buys such goods or services or both using internet protocol address located in India.

E-commerce supply or service has been defined to mean the following:

  • online sale 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 (iv) any combination of activities listed in clause (i), (ii) or clause (iii).


As per the latest amendment, Equalisation Levy of 2% shall not be charged:

  • where the e-commerce operator making or providing or facilitating e-commerce supply or services has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment;
  • where the equalisation levy is leviable under section 165 i.e., at the rate of 6%; or
  • where sales, turnover or gross receipts, as the case may be, of the e-commerce operator from the e-commerce supply or services made or provided or facilitated is less than two crore rupees during the previous year.

Definition of ‘E-commerce Operator’ widened

E-commerce Operator has been defined to mean a non-resident who owns, operates or manages digital or electronic facility or platform for the online sale of goods or online provision of services or both. It covers a wide variety of activities that would make a non-resident fall under the definition.

The issue here arises that several businesses would be required to evaluate their operations. Businesses which were not considered as e-commerce operations, in a typical manner, would now very well fall under the ambit of EL.

It is to be understood that in today’s time, several small or brick and mortar businesses have started providing their goods online for sale. Now, they would also be covered under this definition. In case of services, if it availed by an Indian consumer/customer, then the business providing that service would be covered under this levy. E.g., A person ‘X’ books his hotel from in Germany via the hotel’s website, then the hotel would be covered within the ambit of the EL.

It should be also be noted that the EL Report envisaged certain kind of payments that may be subjected to EL. The way to do business has changed exponentially since the publication of the EL Report in February 2016, but the essence of taxing such transactions remains the same.

The overlap between Significant Economic Presence and EL

Finance Act 2018 introduced the concept of ‘Significant Economic Presence’ (SEP) in the Income Tax Act 1961 (ITA) for taxation of non-residents in India by expanding the scope of the definition of “business connection” through Explanation 2A to section 9(1)(i) of ITA. Significant Economic Presence was defined to mean:

1. transaction in respect of any goods, services or property carried out by a non-resident in India including the provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or

2. systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means:

It is further provided that the transactions or activities shall constitute significant economic presence in India, whether or not the agreement for such transactions or activities is entered into in India or the non-resident has a residence or place of business in India or renders services in India. Moreover, it is also provided that only so much of income as is attributable to the transactions or activities referred above shall be deemed to accrue or arise in India.

After the introduction of SEP, any income derived from such SEP would be taxable in India. If we look at the SEP and EL, then they both were introduced to levy tax on the income derived from digital means. So, is there any overlap between the two?

Section 10 of the ITA allows different types of exemptions for different types of assessee. An amendment has been made to section 10(50) vide Finance Act 2020, whereby which any income arising from e-commerce supply or services which will be covered by the EL will now be exempt from tax under section 10(50). This amendment makes sure that there will be no overlap between the two.

Transaction between Non-residents

The EL 2.0 covers the transactions between two non-residents. The transactions between the non-residents can be taxed in specific circumstances i.e., sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India and sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India.

This would mean that if a tourist who is a non-resident purchases goods or services through the website or e-commerce platform of another non-resident, while using Indian IP address, then it would be covered under EL 2.0.

Implementation of the levy in such cases might be an issue. No mechanism has been set out that will be used by the tax authorities to track the IP address.


It was hoped that tax authorities grant relaxation in the compliance of EL 2.9. The First compliance was due on 7th July 2020 and due to the world gripped by pandemic, businesses found it difficult to revamp their business models in order to comply with EL. Also, the EL 2.0 was enactment with such a speed that businesses were left surprised and unprepared.

Interestingly, the government of the United States of America had initiated an investigation of digital taxes levied by some countries, including India.

It is important that the Indian government re-affirms its stance on rolling back the EL once a solution based on global consensus is reached and finalised by OECD. The government should also release guidance to simplify, clarify and narrow the scope of the levy. It should also consider waiving the interest levied for the first instalment taking into consideration several challenges that were faced by the companies.

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May 2024