Digitalization and virtualization has significantly changed the business landscapes. The traditional brick-and-mortar business model is already on the verge of death owing to rampant revolution and growth of technology. The Government of India recently introduced amended Equalization Levy (EL) or EL 2.0, in the Finance Act 2020, which is effective from 1 April 2020. This levy has taken the ecommerce industry by surprise due to its far outreach.
With the ability to do business in any market without having a physical presence, challenge of allocation of taxing rights of income from an online market has always been a key issue. Given the digital e-commerce model, the traditional rules of Permanent Establishment (PE) taxation under international tax treaties and domestic tax laws are barely sufficient. It has consequently left a significant hole in the exchequer with government labelling the phenomenon as “erosion of tax base”, which emerged as the foremost theme of the Organization of Economic Cooperation and Development (OECD) /G20 led Base Erosion & Profit Shifting (BEPS) Action Plans.
It was with this objective OECD in its BEPS Action Plan 1 indicated that the existing taxation system and policies needed significant changes to tax the digital business transactions across the globe.
While, no concrete approach under the BEPS Action Plan 1 could be provided for taxing digital transactions, however, as an interim measure, below three options were suggested which a country may choose to adopt in their domestic tax laws subject to their bilateral tax treaties:
– Significant Economic Presence (SEP)
– Withholding tax on digital transactions;
– Equalisation Levy
India has a large consumer base and is a market economy which houses a population of over 1.3 billion people. Thus, source country taxation model becomes crucial for a country like India to gain its fair share of tax from the digital transactions of the Non Residents.
Thus, India has been a frontrunner in adopting unilateral digital tax framework. In 2016, India introduced EL or EL 1.0 (or popularly known as Google tax in India) of 6 per cent on digital/online advertisement and related services. Amongst others, the likes of Amazon and Facebook were made to pay EL 1.0 on their specified digital services/digital advertisement income earned from India. It applied only on B2B transactions.
From April 1 2020, India has widened the scope of EL to include “e-commerce supply or services” provided by Non Resident e-commerce operators, under the purview of the digital taxation. On some parameters, the new scope appears to be quite similar to the Digital Service Tax announced by the European Union.
The salient features of EL 2.0 are as under:
|Applicability||Non-resident “e-commerce operators” providing “e-commerce supply or services” to:
1. a person resident in India; or
2. a non-resident in ‘specified circumstances’; or
3. a person who buys such goods or services or both using Internet Protocol (IP) address located in India.
4. ‘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||1. Online sales of goods owned by the e-commerce operator; or
2. Online provision of services provided by the e-commerce operator; or
3. Online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
4. Any combination of the above.
|Specific exclusions||1. Where the e-commerce operator has a permanent establishment in India and such e-commerce transactions are effectively connected with such permanent establishment;
2. Where the EL is already falling within the ambit of digital or online advertisement (i.e. El 1.0); or
3. 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.
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||EL is said to be a separate charge (levy) created in the Finance Act 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.|
SEP vs EL or an overlap?
The Finance Bill, 2018 had introduced the concept of ‘SEP’ in India. The concept has been introduced by amending the definition of ‘business connection’ under Section 9(1)(i) of the Income-tax Act, 1961 (‘the Act’). After the amendment, ‘SEP’ of an entity will also constitute ‘Business Connection’ under section 9(1)(i) of the Act. Therefore, after the said amendment, income derived by a Non Resident from ‘SEP’ in India will be chargeable to tax in India.
The purpose of introduction of SEP is to widen the tax base of India. The intention and object is to charge tax on Non Resident entities who interact with all consumers of India without having any physical presence in form of office or any other premises in India. This provision was earlier proposed to be effective from Assessment Year 2021-22, but has now been deferred to Assessment Year 2022-23. The threshold for applicability of provisions SEP has not been notified by the Indian Government till date.
EL and SEP, both have been introduced to levy tax on the income derived out of digital means, and therefore, one question which arises is that if there is any overlap of taxation under the two schemes of taxation.
While, there exists an overlap in terms of coverage of the transactions, however, such overlap has been eliminated by way of introduction of Section 10(50) of Act, which grants exemption to income which has already been taxed under the EL. Furthermore, the benefit of tax treaty for transactions subject to EL may not be available to the Non Resident and thus EL may be an additional cost for business. However, on the other hand, the Non Resident could avail the benefit of tax treaty in respect of transactions taxed under SEP, or get a credit in the home country in respect of the taxes paid in India subject to conditions, if any, applicable as per their local laws
(The views expressed above are strictly the personal views of the author and do not represent views of any organization)
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