Development of the digital space expanded the scope of business opportunities globally. E-commerce has now proved to be a most feasible means for business expansion, less costs and wider reach. A number of tax challenges arose with such technological adaptations of business with respect to the payment obligations and non residents escaping the tax liability.
The Organization for Economic Cooperation and Development (OCED) has also been working towards tax challenges arising out of digitalisation in the Base Erosion and Profit shifting project to deliver possible solutions on top priority as rightly pointed out by them that “new technologies have facilitated tax avoidance through the shifting of profits by multinational enterprises (MNEs) to low or no tax jurisdictions.” [i]
The BEPS Report on Action 1 clearly highlights the need for modifying existing international taxation rules, and identifies three options, i.e. a new nexus based on significant economic presence, a withholding tax on digital transactions, and Equalization Levy.[ii]
India has also been reforming the tax systems to address such challenges and ensure tax payments on digital services through the introduction of Equalisation levy in the Income-tax Act, 1961 ( “the Act”).
2. Equalisation Levy
Equalisation Levy is a form of direct tax. The primary issue with such type of unconventional taxing is lack of payment getaways and methods, for this reason the payment is withheld at the time of payment by the service recipient.
Equalisation levy under the Income Tax Act is divided under two categories to be taxable on :
3. Specified Services
Introduced vide Finance Act 2016 under Section 165 of the Act, the following two services have been included under specified services and any other service can be included as may be notified by the Central Government:
1. Online Advertisements
2. Digital advertising platforms/ space/ services for the purpose of digital/online advertisement.[iii]
The provision of specified services is applicable to a non resident having received or receivable such service from a person resident in India and carrying on business or profession or a non resident having a permanent establishment (PE) in India.
Determining the PE of an entity is important under this amendment as it is being levied on entities that do not have a PE in India. PE as defined under section 164 (g) includes “a fixed place of business through which the business of the enterprise is wholly or partly carried on;” The Andhra High court in the case of Commissioner of Income Tax (CIT), A.P.-I v. Visakhapatnam Port Trust[iv] held that ““permanent establishment” postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country.”
To be liable for equalisation levy under specified services the following two conditions shall be met:
1. The payment should be made to a non-resident who does not have a permanent establishment in India and neither is the specified service connected with such permanent establishment;
2. The annual payment received by such service providers in the previous year exceeds a sum of one lakh rupees made to one service provider.
The equalisation levy applicable on such specified services is at the rate of six percent. The recipient of such service shall deduct from the amount payable to the non resident and be therefore be paid by the assessee to the Central Government.[v]
4. E-commerce supply of services
The Finance act 2020 expanded the scope of the Equalization by inserting section 165 A to introduce a new levy on e-commerce supply of services (online sale of goods or provision of services) by a non resident e-commerce operator. (Equalisation 2.0)
“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;”[vi] This reform intends to remove the need of physical presence in India in order to fulfill the tax obligations.
This levy on e-commerce supply by non residents came into effect on the 1st April 2020 and is applicable on an e-commerce operator having received or receivable from e-commerce supply or services to a person resident of India or a person in specified circumstances i.e. sale of advertisement or date from a person resident in India or a buying goods or services or both using the Internet protocol of India.
In a recent Delhi high court ruling where the Petitioner (MasterCard) was seeking a stay of payment of equalization levy under Section 165A read with Section 166 A of the Finance Act, 2016 as amended by Finance Act, 2020. The court herein laid emphasis on the Authority of Advance Ruling dated 6th June, 2018 which held that the applicant has multiple permanent establishments in India and consequently, the sum received by the applicant from its customer banks located in India is liable to tax in India. Therefore MasterCard having PE in India does not have to pay the Equalisation levy.[vii]
To be liable for equalisation levy under e-commerce supply of services the following conditions shall be met:
1. The e-commerce operator does not have a permanent establishment in India and neither is connected with such permanent establishment;
2. The equalisation levy is not charged under specified services. (Section 165)
The equalisation levy applicable on such e-commerce supply of services is at the rate of two percent and is payable by the e-commerce operator at every quarter due date to the Central Government.[viii]
5. Furnishing of statement & processing.
Under section 167 the assessee / e-commerce operator within the prescribed time limit has to prepare and deliver or cause to be delivered to the Assessing Officer with particulars as prescribed.
In case of revision of statement, a revised statement, any time before the expiry of two years from the end of the financial year in which the specified services was provided or e-commerce supply or services was made or provided or facilitated has to be filed. In case of non-furnishing of statements the assessing officer shall serve a notice.
The application is further processed & computed as under section 168.
In case there is a delay in payment of the equalisation tax levied then:
Interest is charged at 1% of the outstanding equalisation levy for every month or part thereof is delayed.[ix]
In case there is non-compliance on behalf of the service recipient at the outset then:
The compliance procedure for levy is the responsibility of the service recipient himself.
1. Penalty for failure of payment
Equalisation Levy not deducted: Penalty equal to the amount of levy failed to be deducted (along with interest and depositing of the principal levy outstanding). Equalisation Levy deducted but not deposited: Penalty equal to INR 1,000/day subject to the maximum of the levy failed to be deducted (along with interest and depositing of the principal levy outstanding).
2. Penalty for failure of filing statement of compliance
INR 100/day for each day the non-compliance continues.[x]
If a false statement has been filed then the person may be subjected to imprisonment of a term up to 3 years and a fine.
7. Appeal provisions
Under the act there are two appeal provisions:
(i) Appeal to Commissioner of Income-tax (Appeals)
(ii) Appeal to Appellate Tribunal.
Beside this, an aggrieved person from the order of the Appellate tribunal can approach the Hon’ble Supreme Court through a Special leave petition under article 136 of the Constitution of India.
8. Non payment- issues
The equalisation levy was an initiative by the Finance Ministry of India to equalise giant tech players like Google, Facebook, Amazon and other players who occupy large market share in the field of e-commerce supply of services through their platforms. Traditional means of taxation could not however achieve the same due to its limitations.
With the introduction of this Digital Services Tax (DST), most of the Tech giants from the United States (US) have been bought under the ambit of this tax payment. To address this, the U.S Trade Representatives have also initiated a 301 Investigation of DST against India and several other countries. The US investigations aim to majorly focus on the following concerns with DSTs: discrimination against U.S. companies; retroactivity; and possibly unreasonable tax policy. [xi]
The Equalization levy brought into effect on 1st April 2020 therefore has been subject to non compliance as these tech giants have been unwilling to adopt this model of tax payment. They have been raising concerns to issues of interpretation and lack of global consensus such as unilateral measures, inconsistency with the treaty obligations, less time window for compliance, concerns on double taxation, concerns on whether tax will be payable on gross or net revenue, concept of PE, clarity on technical terms, violating free trade by preferential treatment to home country, difficulty in changing the billing system and rework on the third party contracts.
This speculation on the ‘clarity of the levy’ is the reason for the nonpayment by these corporations.[xii] However it should be noted that the same has been with other corporate taxes and the government has clearly ruled out the necessity of further clarification in the Equalisation levy on e commerce supply of services.
Moving forward such reforms will be the only way for India to address the taxing issues of modern technology & their services. These multinational companies with the introduction of new technology move faster everyday with time and modern traditional taxation methods cannot upkeep with the new and latest services they keep offering. Not making quarterly payments and extending deadlines just makes their object of cartelization to persuade the government more intrusive. There is no doubt that the non-payment of tax is cartelized by the multinational corporations to protect their financial interests, however the same can be challenged legally or with a due representation to the Ministry with their concerns.
Exploring Tax saving methods has been ongoing practice for all business entities. With the expansion of digital space the foreign internet majors have been escaping the tax liability and earning a huge chunk from their revenue. Equalisation levy has been an effective step to reduce the taxing difference between digital services and the traditional brick and mortar businesses.
[i] OCED, BEPS Actions, http://www.oecd.org/tax/beps/beps-actions/
[ii] BEPS Actions Article 1, http://www.oecd.org/tax/beps/beps-actions/action1/
[iii] Section 164 (i) of the Act
[iv] 1983 144 ITR 146 AP
[v] Section 166 of the Act
[vi] Section 164 (ca) of the Act
[vii] Mastercard Asia Pacific Pte Ltd vs Union of India & Ors W.P (C) 10944/2018
[viii] Section 166A of the Act
[ix] Section 170 of the Act
[x] Section 172 of the Act
[xi] Initiation of Section 301 Investigations of Digital Services Taxes, Federal Register, https://www.federalregister.gov/documents/2020/06/05/2020-12216/initiation-of-section-301-investigations-of-digital-services-taxes
[xii] Google, Facebook, LinkedIn give paying new India tax a miss, Economic times, 28th August 2020. https://economictimes.indiatimes.com/tech/internet/internet-majors-give-paying-new-tax-a-miss/articleshow/77754872.cms