BRIEF/ABSTRACT
It is not a secret anymore that the ever increasing digitalization of businesses has rendered the tax rules developed to serve the needs of the traditional business models, futile. The digital age has encouraged a phenomenal expansion of businesses, in multiple territories without establishing their physical presence in any country. To overcome the challenges of taxing the transactions undertaken in the virtual world, India, a staunch supporter of source based taxation with respect to the digital economy, brought forth the Finance Act 2020, which introduced amendments to the Equalisation Levy of 2016. The aim of the article is to firstly provide an overview of the provisions of the Equalisation Levy in 2016 and thereafter the change in the legal position pursuant to the amendment vide Finance Act 2020. Secondly, the paper aims to analyse the impact of the amended version of equalization levy on the worst hit non-resident e-commerce operators. The inconsistencies in the applicability of the levy, the burden of double taxation and the impractical responsibilities posed through exhaustive compliance obligations, pose a challenge in themselves which needs due consideration. Thirdly the article will argue that the Two Pillar Approach culling out of the G20-OECD Inclusive framework deal seems a more laudable approach for India. Though it will roll out the equalization levy for some companies, but it will further the dream of India of not only adopting equitable distribution of tax revenues of MNCs and in particular enterprises that do not have a physical presence in the territory but derive a huge chunk of profits from it, but also provide authority to the source countries to tax global companies at a consensual minimum agreed rate. Both the pillars generate additional advantages such as allocating 20-30 percent of residual profits of the digital companies to the market countries[1], preventing treaty shopping and allowing countries to tax the income lost to tax havens.
INTRODUCTION OF EQUALISATION LEVY IN INDIA
Digitalisation has played a major role in not only transforming the key aspects of our everyday life but also the way our society and economy function. Along with this, the digital age has aided enterprises in conducting their businesses across jurisdictions, without establishing and maintaining their physical presence in the particular jurisdictions. The act of Multinational enterprises (hereinafter referred to as ‘MNEs’) wherein they take advantage of the loopholes present in the interaction of different tax jurisdictions to shift their profits to low-tax jurisdictions, to reduce their taxable income, serves an evidence to the fact that the international tax rules which have been in place for the past 100 years are not adept to meet the requirements of the modern global economy.
To address this issue, OECD in July 2013 published a report titled ‘Action Plan on Base Erosion and Profit Shifting’, which culled out 15 actions for tackling Base Erosion and Profit Shifting.[2] Pursuant to the report, the Task Force on Digital Economy was brought into picture in September 2013, which in its Action Plan 1 Report, gave the three alternatives of developing a new nexus to tax the digital economy, which were: the principle of significant economic presence or; introducing a withholding tax on digital economy or; imposing an equalization levy, one of which the countries were free to impose unilaterally, provided it was consistent with their treaty obligations.[3]
In response to the Action Plan 1 Report of OECD, The Department of Revenue, Central Board of Direct Tax and the Ministry of Finance constituted the Committee on taxation of e-commerce, in 2016, to examine the issues of taxation that arise in a digital economy. As recommended by the Committee, a chapter titled ‘Equalization Levy’ was introduced in the Finance Act 2016 in order to impose a 6% levy on consideration received or receivable for online advertisement service.
To further overcome the challenges of taxing the transactions undertaken in the virtual world, India, brought forward a second branch of equalization levy in 2020, which was levied on consideration received or receivable by an e-commerce operator, for e-commerce supply of goods or services.
However ambiguities were prevalent in the amendment version of this levy and this can be traced to the unusual fashion in which the levy was introduced, considering that it was never a part of the Finance Bill 2020 and was directly inserted into the Finance Act, 2020, without any prior discussion during the proposal stage.[4]
The industrial fraternity long waited for the Finance Act, 2021 and 2022 to fill in the gaps created by the 2020 levy. The 2022 Finance Bill does not mention anything about the equalization levy and therefore the next section will analyse whether or not the 2021 amendment acted as a problem to a solution.
EQUALISATION LEVY 2021: A PROBLEM TO A SOLUTION?
1. “ONLINE SALE OF GOODS/SERVICES”
Vide Section 165A of the Finance Act, 2020, equalization levy was chargeable on a non-resident ‘ECO’ who “owns, operates or manages digital or electronic facility or platform” for “online sale of goods” or “online provision of services” or both. While the 2020 Act clearly defines the term “e-commerce operator”[5], it does not define what the terms “electronic facility”, “digital”, “platform”, “online sale”, “online provision of services”, “goods”, signify, which creates interpretational problems. In the absence of the definition of “online sale”/“online provision of service”, it was difficult to determine whether the levy would be applicable on the transactions which include solely online sale of goods or services or would the scope of the levy extend to also cover instances where the contract of sale is online but the actual sale or provision of service has concluded offline.[6] Further, the wide scope of the 2020 Levy could have produced unintended consequences. For instance, ‘EY’ would be applicable on a transaction wherein a financial services entity electronically provides service to an individual who uses an Indian IP address to avail the service while travelling to India on a holiday. To determine the applicability of the levy, it would be unfeasible or impractical to expect non-resident e-commerce operators to point out the method of access to the platform/residential status of each customer or to keep a track of the location or the IP address of each user.[7]
The Financial Act, 2021 vide an explanation to clause (cb) of Section 164 of the Finance Act, 2016, expressly clarified that any of the activities of “(a) acceptance of offer for sale; (b) placing of purchase order; (c) acceptance of purchase order; (d) payment of consideration; (e) supply or service, wholly or partly online” would constitute sale/service being provided online. All the steps present in a sales lifecycle have been covered within the aforementioned explanation, other than display of products and their prices on a digital platform or a mere sales enquiry. In response to the section 301 Report of U.S. on Equalisation Levy, dealing with investigation against ‘DST’, India purported that the “purpose of the Equalization Levy is to ensure fair competition, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations.”[8] Since the entire sales lifecycle has been fragmented to even include any of the activities that lead up to a sale that are undertaken online using a digital facility, the only conclusion one can draw is that the amendment has undoubtedly expanded the levy far beyond what India purported to tax, which was those businesses that have a ‘close nexus’ with the Indian market, via digital operations.[9]
Further, the 2021 ‘EY’ can cover within its wide ambit not only e-commerce non-resident retailers but also businesses which operate in the brick-and-mortar model, where only a small part of the business operates through digital means. The way the provisions are worded makes any correspondence for sale and purchase of goods/services between a foreign company (seller) and a customer in India, over any “digital or electronic facility or platform” subject to ‘EY’, even if it is through fax-machines, emails or even telephones.[10] The impact of the extended definition is that even when a good is purchased and sold through offline/physical mode but only the payment is made online, it would attract the levy.[11] The repercussions are felt by those ‘ECOs’ providing services as well.[12] For instance, if an overseas hotel is booked through a website, the mere fact that booking of hotel has taken place through an online mode while all the hospitality services are enjoyed by the customer in a physical mode, the transaction would attract the levy.
2. “CONSIDERATION RECEIVED OR RECEIVABLE”
The expanded levy under the Finance Act, 2020 did not define the term ‘consideration received or receivable’. Therefore, in cases where the e-commerce operators were merely facilitating sale, in lieu of commission, ambiguities prevailed as to whether equalization levy would be applicable on the net amount of commission left with the market-place operator or the gross amount of sales. The 2021 Finance Act through an amendment to Section 165A of the Finance Act, 2016, clarified that the consideration for sale of goods/provision of services received or receivable from e-commerce supply or services would be subject to equalization levy, irrespective of whether the e-commerce operators is the owner of the good/service. This amendment will have a significant impact on the e-commerce-operators as now the expanded levy will be applicable on the total value of sale of goods or provision of services as opposed to the commission earned by the platform.
While for e-commerce operators which charges commission, the entirety of the consideration received by them will be subject to the levy and not just the commission finally received by it; for e-commerce operators who are not charging commission, equalization levy would be applicable on the entire amount remitted to the seller. This goes entirely against the objective of the levy which was to tax the income of non-resident platforms which were going untaxed in India.[13]
Additionally, equalization levy is not governed by tax treaties and therefore the supplier cannot claim income tax credit in their home countries.[14] This essentially means that equalization levy will increase the cost of doing business and the e-commerce operators will have to pay tax on the entire profit in their home countries apart from the tax on revenue which has already been paid by them in India. The end consumers in some cases will bear the brunt as e-commerce operator will pass on these digital taxes to them. For instance, Google has clarified that they would pass on the India’s equalization levy to all its clients even in situations where the advertisements are visible in the country, despite the recipient of service not being an Indian user.[15]
3. PAYMENTS TAXABLE AS ROYALTY/FEES FOR TECHNICAL SERVICES
The 2020 Amendment to the Finance Act, made any income arising from e- commerce supply or services which will be covered by the equalization levy exempt from tax under section 10(50) of the Income Tax Act, 1961. However, the 2020 Amendment made the aforementioned effective only from 1 April 2021, which could have resulted in double taxation of the said income in the FY 2020-21, if not for the 2021 Financial Act. The Act synched the dates of equalization levy and the corresponding exemption from Income Tax by amending Section 10(50) of the Income Tax Act, 1961, to make the section operative from 1 April 2020 itself.[16] Further, the Finance Act, 2021 inserted a proviso to Section 163 of the Finance Act 2016, which prevented consideration which were taxed as ‘royalty’ or ‘FTS’ under the Income Tax Act, 1961 and the relevant Double Tax Avoidance Agreement (DTAA), from also being subjected to equalization levy.
This classifies as a welcome move as the clarification will go a long way in preventing unwarranted litigation as well as avoiding payments in the nature of royalties and FTS which fall within the bounds of equalization levy, to be subject to double taxation.[17]
THE TWO PILLAR GLOBAL TAX DEAL: A SOLUTION TO THE UNILATERAL APPRAOCH
136 members of the G-20 Inclusive Framework on Base Erosion and Profit Shifting/Organization for Economic Cooperation and Development (OECD) joined the “Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy”[18], to push the backward international tax system into the 21st century. Pillar One aims to re-allocate the taxing rights over ‘MNEs’, including digital companies, from the home countries to the countries where they undertake business activities and earn profits, despite them having no physical presence, to provide a fairer distribution of profits as well as taxing rights amongst countries. On the other hand, Pillar two aims to introduce a global minimum corporate tax of 15% to put a floor on corporate tax income competition and prevent the erosion of tax base of countries.
Under Pillar one, market jurisdictions with ‘MNEs’ having a global turnover above 20 billion euros and a profitability above 10% before taxes, will be allocated 25% of the residual profits which is profit in excess of the 10% of revenue. The new special purpose nexus rule further permits the allocation of the aforementioned amount to market jurisdiction when they derive at least 1 miilion euros from there and a lower threshold of 250 000 euros for smaller jurisdictions with a GDP below 40 billion euros. OECD claims that “taxing rights on more than USD 125 billion of profit are expected to be reallocated to market jurisdictions each year”[19]. In 2020-21, India saw an 85 percent growth as it earned INR 20.57 billion from ‘EY’ as compared to the INR 11.36 billion earned in the preceeding fiscal year.[20] However, the annual revenue threshold for application of Pillar one is Euro 20 billion as compared to the current lower threshold of India of Euro 0.2 million[21] under ‘EY’. By joining the global taxation pact, though India will have to forego its taxation rights on some of the MNEs due to the higher threshold imposed by Pillar One, it is still in favour of a consensus solution which is easier to implement as well as comply with and which results in “allocation of meaningful and sustainable revenue to market jurisdictions, particularly for developing and emerging economies”[22].
The Multilateral Convention (MLC) requires all members to put a standstill to ‘DST’ and all other unilateral measures with respect to all companies and a commitment to not bring forth such measures in the future. The two-pillar package mandated no introduction of any form of ‘DST’ from the 8th October until either 31 December 2023 or the coming into force of the ‘MLC’, whichever is earlier and this implies that India will have to withdraw its ‘EY’ by 2023.
The members of the Inclusive Framework concluded that a coordinated approach is more favourable than unilateral tax measures as it undermines investment and tax certainty; imposes additional administration and compliance costs and; gives rise to trade disputes and trade tensions between governments, leading to a reduction in Global GDP by more than 1%.[23] One such instance was the announcement of the punitive tariffs for six months for India, Turkey, Spain, United Kingdom, Italy and Italy and its immediate suspension as a retaliation to the ‘DST’ adopted by these aforementioned countries which according to the U.S. is inconsistent with the principles of international taxation and discriminatory against the US digital companies as it unduly burdens them.[24] In particular, in s 301 Report of U.S. on Equalisation Levy, U.S. concluded that firstly, India’s DST discriminates against U.S. digital companies as out of the 119 companies that would be subject to the levy, 86 (72%) are U.S. companies, secondly, it unreasonably goes in contravention to international tax principles as it fails to provide tax certainty, taxes companies which have no permanent establishment in India and taxes their revenue rather than income and thirdly, it restricts and burdens U.S. commerce due to its unusually expansive scope which would create an aggregate bill exceeding US$30 million per year for U.S. companies, forces them to undertake costly measures to comply with the payment of the tax and reporting requirements and subjects them to double taxation. A coordinated approach between the members would prevent retaliatory trade sanctions and trade tensions that could arise as a result of such unilateral measures.[25]
Corporate tax avoidance costs countries around the world a loss of revenue around $300 to $500 billion each year and leads to an accumulated global wealth of $8.7 trillion in low tax jurisdictions.[26] U.S. companies from 2000-2018, booked half of their foreign profits in seven tax havens such as Ireland, Netherlands, Switzerland, Singapore, Bermuda, Luxembourg and Cayman Islands.[27] Pillar two that imposes a global minimum corporate tax will discourage the MNEs from shifting tax revenues and profits to low tax jurisdictions as they would have to pay a minimum amount of tax irrespective of where they are based. This pillar further brings forth the subject to tax rule (STTR), a treaty based rule, that combats the risks posed to source countries by targeting intra-group payments which take advantage of nominal rates of taxation present in a contracting jurisdiction.[28] MNEs would be prevented from engaging in treaty shopping which is an attempt by persons, who is not a resident of that jurisdiction, to indirectly use the benefits of a tax treaty that is present between two jurisdictions, as the source country would now be allowed to put a top-up tax on certain covered payments, in an attempt to bring the payments up to the agreed minimum rate.[29] This will also put an end to profit shifting by MNEs through tax havens which have thrived over the years through setting up of shell companies and by offering secrecy (for example, bank secrecy), as pillar two will now ensure that these companies pay a minimum effective tax of 15% on the profits booked in the source jurisdiction, irrespective of where they are headquartered.[30]
CONCLUSION
The amended Equalisation levy which was rolled out in 2020, to overcome the challenges of taxing the transactions undertaken in the virtual world, brought forth various challenges for e-commerce operators. The ambiguities related to the phrases “online sale of goods/services” and “consideration received or receivable” along with the burden of double taxation and the inability of e-commerce operators to claim income tax credit in their home countries, are some of the obstacles posed by the amended version of equalization levy. In the event of such uncertainty, the Two Pillar Approach of the G20 Inclusive Framework, acts as a knight in shining armor as it permits allocation of meaningful revenue to market jurisdictions; prevents formation of tax havens and imposition of retaliatory trade sanctions and trade tensions and; reduces additional administrative and compliance costs on e-commerce operators.
[1] ‘G20 Finance Ministers endorse the Two Pillar approach and its impact across the world including India’ (Taxman 26 July 2021) < https://www.taxmann.com/post/blog/g20-finance-ministers-endorse-the-two-pillar-approach-and-its-impact-across-the-world-including-india/ > accessed 24 August 2021.
[2]OECD, ‘Action Plan on Base Erosion and Profit Shifting’ (2013) <https://www.oecd.org/ctp/BEPSActionPlan.pdf> accessed 5 October 2021.
[3] OECD, ‘Addressing the Tax Challenges of the Digital Economy, Action 1 – 2015 Final Report’ (2015) <https://read.oecd-ilibrary.org/taxation/addressing-the-tax-challenges-of-the-digital-economy-action-1-2015-final-report_9789264241046-en#page1 > accessed 15 October 2021.
[4]Rahul Mitra, ‘Equalisation Levy – Another Year of Ambiguity?’ (2021) Taxsutra < https://www-taxsutra-com.opj.remotlog.com/dt/experts-corner/equalisation-levy-another-year-ambiguity > accessed 2 October 2021.
[5] Finance Act, 2020, s 165A.
[6]Nishith Desai Associates, ‘Indian Equalization Levy Expanded – A Surprise Move!’ (2020) Bloomberg Publication.
[7] ibid 7.
[8]Ministry of Commerce & Industry, India’s response to S 301 Report of U.S. on Equalisation Levy
( 2021).
[9]Manoj Kumar and Anita Nair, ‘Equalisation Levy 2.0 – Does Finance Bill, 2021 Make the Levy All-Encompassing?’ (2021) < https://www-taxsutra-com.opj.remotlog.com/dt/experts-corner/equalisation-levy-20-does-finance-bill-2021-make-levy-all-encompassing > accessed 5 October 2021.
[10]Aparna Khatri, ‘Equalisation Levy – Budget 2021 Impact!’(2021) <https://www-taxsutra com.opj.remotlog.com/dt/experts-corner/equalisation-levy-budget-2021-impact >.
[11] Dhruva ‘Equalisation Levy, Taxing cross-border e-commerce transactions’ (2021).
[12] ibid 2.
[13] Arijit Ghosh, ‘India: Equalisation Levy Expansion 2021 – How Does It Affect Marketplaces And Online Platforms?’ (The National Law Review, 25 February 2021) <https://www.natlawreview.com/article/india-equalisation-levy-expansion-2021-how-does-it-affect-marketplaces-and-online >.
[14] RSM, ‘Research Report: India Introduces 2% Equalisation Levy on Non – Resident E -commerce Operators’<https://www.rsm.global/india/sites/default/files/media/RSM%20India/Publications/2020/rsm_india_research_report_-_india_introduces_2_equalization_levy_on_e-commerce_operators.pdf> accessed 7 October 2021.
[15] Sachin Dave, ‘Google to pass on ‘Google tax’ from October’ Economic Times (2021).
[16] Jimit Devani and Jason Sanctis, ‘Widening the scope of Equalisation Levy –Finance Bill, 2021’ (2021) Taxsutra <https://www-taxsutra-com.opj.remotlog.com/dt/experts-corner/widening-scope-equalisation-levy-finance-bill-2021> accessed 10 October 2021.
[17] ibid (n 19).
[18] OECD/G20 Base Erosion and Profit Shifting Project, ‘Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy’ (2021) < https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-october-2021.htm > accessed 15 October 2021.
[19] OECD/G20 Base Erosion and Profit Shifting Project, ‘Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy’ (2021).
[20] Melissa Cyrill, ‘India Joins Consensus on OECD Tax Deal Ahead of G20 Meeting in Venice’ (2021) India Briefing <https://www.india-briefing.com/news/oecd-tax-deal-g20-meeting-india-position-22629.html/> accessed 2 October 2021.
[21] Finance Act, 2016, s 164(2)(iii).
[22] Ministry of Finance, India joins OECD/G20 Inclusive Framework tax deal (2021).
[23] ibid (n 31) 16.
[24] Office of the United States Trade Representative, ‘USTR Announces, and Immediately Suspends, Tariffs in Section 301 Digital Services Taxes Investigations’ (2021).
[25] Office of the United States Trade Representative Executive Office of the President, Section 301 Investigation Report on India’s Digital Services Tax (2021).
[26] Madhav Ramachandran,’What Should India’s Response Be to the Global Minimum Corporate Tax Debate?’ The Wire (22 April 2021).
[27] ‘G-20 finance ministers back reforms to stop use of tax havens’ Business Standard (11 July 2021).
[28] OECD, ‘Tax Challenges Arising from Digitalisation – Report on Pillar Two Blueprint’ (2020).
[29] ibid 16.
[30] ibid (n 31) 19.
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