Prologue
With blistering digitalisation, the concern of base erosion escalated further which reflected in BEPS Project, endorsed by G-20 and OECD, to which India was an active participant. Out of three options, suggested in report on Action 1 of BEPS Project, to address tax challenges of digital economy India adopted Equalisation Levy in 2016.
When Equalisation Levy was introduced by Finance Act, 2016 the responsibility of compliance was shouldered on the payer* by way of deduction @ 6% and levy was limited to following services:-
1. online advertisement;
2. any provision for digital advertising space; or
3. any other facility or service for the purpose of online advertisement
*Resident payer using such specified services for business purpose or non-resident having a Permanent Establishment (‘PE’) in India provided such specified services are effectively connected with such PE.
To keep introduction of Equalisation Levy short and concise, the readers are suggested to refer the Author’s article titled “Equalisation Levy – Is it a beginning of a new saga? – [2016] 71 taxmann.com 195 (Article)”.
Expanding Footprints by Finance Act, 2020
The scope of Equalisation Levy has been widened by Finance Act, 2020 by levying 2% Equalisation Levy to be collected by non-resident ‘e-commerce operator’ for e-commerce supply of goods or services w.e.f. 1 April 2020.
‘E-commerce operator’ (‘ECO’) 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.
‘E-commerce supply of goods or services’
‘E-commerce supply of goods or services’ means
(i) Online sale of goods by ECO
(ii) Online provision of services by ECO (e.g. e-learning, e-gaming, online hotel or travel package or ticket booking, etc.)
(iii) ECO facilitating online sale of goods or online provision of services
(iv) Any combination of above
To be within the ambit of said 2% levy, ‘E-commerce supply of goods or services’ should be to the following persons:
(i) A person resident in India; or
(ii) A person who buys such goods or services using Internet Protocol (‘IP’) address located in India; or
(iii) A non-resident in the circumstances specified in section 165A(3).
Following circumstances are specified in section 165A(3):
1. Sale of advertisement which targets a customer
i. Who is resident in India; or
ii. Who access such advertisement through IP address located in India
E.g. a non-resident gives its advertisement on website/platform of a non-resident ECO and such advertisement targets Indian resident.
2. Sale of data to non-resident, provided such data is collected by non-resident ECO from a person
iii. Who is resident in India; or
iv. Who access such data through IP address located in India.
In case there is any overlapping situation where both 2% and 6% rate attracts, then 6% equalisation levy provisions will apply. For example, in case of online advertisement service by a non-resident ECO not having a PE in India to another non-resident having PE in India where such advertisement targets a customer who is resident in India.
‘Online’
‘Online’, means a facility or service or right or benefit or access that is obtained through the internet or any other form of digital or telecommunication network.
Non-applicability of 2% levy
2% Equalisation Levy will not apply in the following situations:
(i) If ECO having a PE in India and E-commerce supply is effectively connected with said PE;
(ii) If sales/gross receipts/turnover of ECO is less than Rs.2 crores during the previous year;
(iii) In those cases where 6% Equalisation Levy applies.
Whether the threshold of Rs.2 crores will be calculated considering global sales or only sales to persons referred to for 2% levy? It seems threshold of Rs.2 crores will be calculated considering only sales to persons referred to for 2% levy.
Issues and concerns
Various terms used in this new levy are very wide in meaning and ambiguous which could invite lots of litigation. Inter-alia, following are few open questions which need to put at rest:
1. What does online sale of goods and online provision of services means? Any transaction of sale of goods or provision of services involves various events like concluding contract, transfer of title, delivery of goods or rendering of services, payment etc. Out of these various events involved in a transaction, what all events should mandatorily take place online for any transaction to be within the ambit of this 2% levy and what events could take place offline?
2. Whether 2% levy will apply only on the consideration amount or on taxes as well (other than 2% levy) which needs to be charged on such goods/services?
3. In case sale of goods or provision of services is facilitated by ECO then whether 2% levy will apply only on the service charges charged by ECO to the seller of goods or provider of services or on the entire amount of sale price of such goods/services?
4. If in case of a ECO, in on-going tax litigation it has been alleged that said ECO has PE in India whereas ECO is of the view that it does not have any PE in India, whether ECO will be liable to 2% Equalisation Levy?
5. If the ECO is not sure whether or not his sales etc. will cross the threshold of Rs.2 crores and therefore ECO decided not to collect 2% levy. However, if in the month of March sales crosses the threshold of Rs.2 crores then whether 2% levy to be paid on entire turnover?
To clear the clouds and to avoid any possible and protracted litigation, it is required that government should clarify these aspects.
A comparative of 6% and 2% Equalisation Levy
| S. No. | Point of comparison | 6% Equalisation Levy introduced by Finance Act 2016 | 2% Equalisation Levy introduced by Finance Act 2020 |
| 1 | Compliance burden on | Service receiver / payer | Non-resident ECO / payee |
| 2 | Payee / Service provider | Non-resident | Non-resident ECO |
| 3 | Payer / Service receiver |
|
|
| 4 | B2B or B2C | Covers only B2B transactions | Covers both B2B and B2C transactions |
| 5 | Non applicability |
|
|
| 6 | Exemption | Under section 10(50) of Income-tax Act 1961 (‘the Act’) | Under section 10(50) of the Act. However, exemption is from AY 2022-23, which means that for AY 2021-22 both 2% equalisation levy and income tax provisions under the Act will apply. |
| 7 | Deduction/ collection | To be deducted by service receiver / payer | To be collected by ECO / payee |
| 8 | Payment to govt. | Monthly – By 7th of next month (e.g. if said levy is deducted in August 2020, then it should be deposited by 7th September 2020) | Quarterly – by 7th of next month (except 31st march for 4th quarter) (e.g. if said levy is collected in August 2020, then it should be deposited by 7th October 2020) |
Appeal
No appeal mechanism has been provided for filing appeal on levy of Equalisation levy or interest on its late payment. However, appeal can be filed against penalty.
Contemporaneous measures
Out of three options, as were suggested to address tax challenges of digital economy, India adopted Equalisation Levy in 2016 and expanded it in 2020. Simultaneously, Govt. of India has also implemented following measures to bring digital economy in tax grab:
1. Significant economic presence
New tax nexus rules based on significant economic presence (‘SEP’) by amendment to section 9. SEP was first introduced by Finance Act, 2018 through an explanation clarifying that SEP shall constitute business connection. Its applicability has been deferred to 1 April 2022 by Finance Act, 2020.
2. Withholding tax on digital transactions
Withholding tax (‘WHT’) is levied on digital transactions by inserting section 194-O, whereby a ECO is required to deduct WHT @ 1% on credit or payment to resident E-Commerce participants (‘ECP’). A higher rate of 5% will apply as per sec. 206AA if ECP does not furnish PAN/Aadhaar.
3. Business Connection
Sphere of business connection has been widened by inserting Explanation 3A to sec. 9(1)(i) of the Act which covers following:
a. Sale of advertisement which targets a customer
i. Who is resident in India; or
ii. Who access such advertisement through IP address located in India
b. Sale of data collected from a person
i. Who is resident in India; or
ii. Who access such data through IP address located in India.
c. Sale of goods or services using data collected from a person
i. Who is resident in India; or
ii. Who access such data through IP address located in India.
Epilogue
The expansion of equalisation levy and other contemporaneous measures will have a significant impact on digital businesses, and more specifically on E-Commerce businesses. In view of extensive digitalisation of businesses, which are growing multi-fold in the light of existing pandemic, the scope of digital taxation including equalisation levy may increase further in times to come.
Author Bio
