Over the last one decade, digital platforms have become important in world economy. The expansion of  digital economy not only created new opportunities but has also raised various tax challenges.  Several countries have introduced unilateral tax measures to tax the digital economy. In 2016, India introduced the concept of ‘Equalisation levy’ on revenue earned by non-residents from online advertisement and related services. The Finance Act 2020 has extended its scope by covering e-commerce transactions within the scope of equalisation levy.  Read more…………………

Background:

With the development in digital economy, the supply and procurement of goods and services have undergone exponential expansion. The business may be conducted without regard to national boundaries. The growing digital economy has dissolved the link between income –producing activity with its location. Persons carrying business in digital domain could be located anywhere in the world. This raises fundamental questions as to how enterprises in the digital economy add value and make their profits and how the digital economy relates to the concept of source and residence or the characterization of income for tax purposes.

To address above issues, Organization for Economic Cooperation and Development (OECD) have developed action plans to address Base Erosion and Profit Shifting (BEPS) issues in a co-ordinated and comprehensive manner. Under action plans, the OECD has addressed the issues of ability of company to have significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, the application of related source rules, how to ensure effective collection of taxes with respect to cross border supply of digital goods and services, develop changes to the definition of permanent establishment (PE) to prevent the artificial avoidance of PE status in relation to BEPS.

Considering the potential of new digital economy and rapidly evolving nature of business operations, Finance Act. 2016 has inserted a new chapter “Chapter VIII” called “Equalisation levy”. The provisions of equalisation levy are not part of the income tax law. This is under separate provision of law. Section 163 to Section 180 of Finance Act 2016 contains provisions for the same.

Charge of equalisation levy on specified services:

As per section 165 of Finance Act. 2016, equalisation levy shall be charged at the rate of six percent on the amount of consideration for specified service received or receivable by non-resident from

a) Person resident in India and carrying on business or profession or;

b) a non-resident having a permanent establishment in India.

“Specified Services” covered under equalization levy

  • Online advertisement
  • Any provision for digital advertising space or any other facility or service for the purpose of online advertisement
  • Any other service notified by the central government in this behalf

Charge of equalization levy on e-commerce supply of services:

The Finance Act, 2020 has extended the scope of equalization levy and covered B2C transactions within its ambit. Section 165A of Finance Act. 2016 contains provisions for charge of equalisation levy on e-commerce supply of services.

As per Section 165A, an equalisation levy shall be charged at the rate of two percent on amount of consideration received or receivable by an e-commerce operator from e-commerce supply or services made or provided or facilitated by e-commerce operator to

a) A person resident in India; or

b) A non-resident on sale of advertisement which targets a customer, who is resident in India or to a customer who accesses the advertisement through Internet protocol address (IP address) located in India;

c) A non-resident on sale of data, collected from a person who is resident in India or from a person who uses internet protocol address (IP address) located in India

d) A person who buys such goods or services or both using internet protocol address (IP address) located in India.

“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

“e-commerce supply or services” means-

  • Online sale of goods owned by 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
  • Combination of above activities

Exceptions to Equalisation levy u/s 165 and 165A:

There are certain circumstances where equalisation levy shall not be charged u/s 165 on specified services and u/s 165A on e-commerce supply or services:

Equalisation levy u/s 165 shall not be charged in following circumstances:

  • The non-resident providing specified service has a PE in India and specified service is effectively connected with such PE ;
  • The aggregate amount of consideration received or receivable by non-resident from a person who is resident in India or from non-resident having PE in India, does not exceed Rs. 1 lakh;
  • Where the payment for specified service made by a person resident in India or by non-resident is not for the purpose of carrying out business or profession.

Equalisation levy u/s 165A shall not be charged in following circumstances:

  • The e-commerce operator providing e-commerce supply or service has PE in India and such supply or service is effectively connected with such PE;
  • Where the equalization levy is leviable u/s 165;
  • Sales, turnover or gross receipts of e-commerce operator from e-commerce supply or services are less than Rs. 2 crore during the previous year.

Collection and recovery of equalisation levy on specified services and on e-commerce transactions (Section 166 and 166A of Finance Act 2016):

Section 166: The amount of equalisation levy so deducted by the payer (being person of resident in India or non-resident having PE in India) on specified services has to be paid to the credit of the central government by 7th day of the month following the month in which the equalisation levy is deducted. Even if equalisation levy is not deducted, the payer is liable to pay to the credit of central government.

Section 166A: The equalisation levy shall be paid by every e-commerce operator to the credit of central government quarterly within following due dates:

Date of ending quarter Due date
30th June 7th July
30th September 7th October
31st December 7th January
31st March 31st March

The only difference between section 166 and 166A is that the burden of compliance under new section 166A is shifted to non-resident e-commerce operator which would typically work on a self-declaration basis.

Furnishing of statement

Section 167 of Finance Act 2016 contains provisions for furnishing of statement by assessee (being a person resident in India or by a non-resident having PE in India) in form 1 on or before 30th June of financial year ended.

It also mentioned that every e-commerce operator shall also furnish a statement electronically within specified time in a specified form in respect of E-Commerce supply of goods or services provided during the financial year.

Interest and penalty

As per provisions of Section 170 of Finance Act 2016, every assessee (being a person resident in India or by a non-resident having PE in India) or e-commerce operator who fails to credit the equalization levy or any part thereof as required under section 166 or section 166A (supra) to the credit of central government within the time as specified therein, shall pay simple interest at the rate of one percent of such levy for every month or part of the month of delay.

 Section 171 and 172 of Finance Act 2016, contains penalty provisions for failure to deduct or pay equalization levy and failure to furnish statement respectively, which is tabulated as under:

Particulars Penalty
Failure to deduct equalisation levy (wholly or partly) as required under section 166 (supra) Amount of equalisation levy that he failed to deduct
Failure to pay equalisation levy to government as required under section 166A (supra) Amount of equalization levy that he failed to pay
Failure to pay equalisation levy to government after deducting under section 165(1) Rs. 1000 for each day of default (not to exceed the amount of equalisation levy)
Failure to furnish statement Rs. 100 for each day of default

The order imposing the penalty shall not be passed unless the assessee or e-commerce operator has   been given reasonable opportunity of being heard.

How the equalization levy is different from TDS on E-Commerce transactions under section 194-O of Income tax Act, 1961

The Finance minister in Budget 2020, has inserted a new section 194-O in Income tax Act. 1961 to provide a new levy of TDS at the rate of one percent on e-commerce transactions. This provision is applicable w.e.f  01st October 2020.

Scope of transactions: The E-Commerce operator is required to deduct TDS on sale of goods or provision of service facilitated by it through digital or electronic facility or platform, at time of credit of amount of sale or service or both to the account of e-commerce participant or at time of payment thereof to such participant by any mode, whichever is earlier.

Equalisation levy Tax on Digital Transaction

Any payment made by purchaser of goods or recipient of services directly to an e-commerce participant shall be deemed to be amount credited or paid by the e-commerce operator to the e-commerce participant and shall be included in the gross amount of sales or services for the purpose of deduction of tax at source.

Rate of TDS: The tax at the rate of 1% (0.75% w.e.f 14.05.2020 till 31.03.2021) is required to be deducted on the gross amount of such sales or services or both.

Exceptions to Section 194-O:  E-Commerce operator is not required to deduct TDS in following circumstances:

  • If the amount paid or credited or likely to be paid or credited to Individual or HUF, during the financial year does not exceed Rs. 5,00,000 and such individual or HUF has furnished his PAN or Aadhar to e-commerce operator.
  • The above provisions are not applicable to non-resident e-commerce participant

As per subsection 3 of section 194-O, transaction in respect of which tax has been deducted by the e-commerce operator under section 194-O or which is not liable to deduction under the exemption as discussed above, there shall not be further liability on that transaction for TDS under any other provisions of chapter XVII-B of that Act.  It has also been provided further that the provisions of above sub-section will not be applicable if any amount is received or receivable by e-commerce operator for hosting advertisement or providing any other service which are not in connection with sale of goods or services as referred to in section 194-O(1).

Explanation to section 194-O defines the meaning of various important terms:

  • “E-commerce” means the supply of goods or services or both, including digital products, over digital or electronic network
  • “e-commerce operator” means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce
  • “e-commerce participant” means a person resident in India selling goods or providing services or both, including digital products, through digital or electronic facility or platform for electronic commerce
  • Services” includes “fees for technical services” and fees for “professional services”, as defined in the Explanation to section 194J.

Thus, every e-commerce operator irrespective of his residential status is required to deduct tax at source from the sum paid or payable to resident e-commerce participants selling goods or providing services in different countries using digital platform of e-commerce operator. 

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