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India, being one of the fastest growing e-commerce market, is expected to see a spurt in the coming years. Moreover, any such pandemic that requires us to stay indoors and avoid physical interactions, has increased the requirement of operators and businesses to use digital platforms to cater customers and serve them with the best possible services in due course of time. Otherwise who could have imagined getting a doctor consultation on website and then getting the medicines delivered at your doorstep in the mid crisis and in such a pandemic?

With this growing pace of digitalization and looking the revenues that are drawn from the use of such platform, it has become a cause of concern for the Government to trace such transactions, calculate the appropriate taxable value and then further tax them, creating it a challenging task. Our traditional taxation rules barely provided any guidelines for taxing such transactions that are carried on through the use of digital platforms without any physical presence in the source country and we needed some provisions to govern the same.

In order to cope with the changing methods of transactions and expansion of digitalization of economy in line with the G20 & OECD Base Erosion and Profit Shifting (BEPS) Action 1, India introduced “equalisation levy’’ on certain non-resident businesses vide Finance Act, 2016. India also became the first ever country to introduce the concept of digital taxation in 2016 by putting forward this levy, in the impression of withholding tax and not that of the income tax. The levy is at the rate of six percent on non-resident companies engaged in online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement and includes any other service as may be notified by the Central Government in this behalf.

Leading it further; Finance Act, 2020 enlarged the scope of this equilisation levy by keeping the earlier provisions unchanged and further including in its ambit the non-resident e-commerce operators with effect from 1st April 2020.  The Finance Act 2020 amended the Finance Act 2016, introducing a new Equalisation Levy at the rate of two percent on the consideration received or receivable by an e-commerce operator from supply or services made or provided or facilitated by it to-

i. a person resident in India; or

ii. a non-resident, in the follow cases:

a) Sale of advertising, which targets a customer who is resident in India, or a customer who accesses the advertising though an IP address located in India; and

b) Sale of data, collected from a person who is resident in India or from a person who uses an IP address located in India

c) Person who buys goods or services, or both, uses an IP address located in India.

With regard to the above, the new Equalisation Levy shall not be levied in the following cases-

i. where the e-commerce operator has a Permanent Establishment (PE) in India and the e-commerce supply or service is effectively connected to such PE.

ii. where Equalisation Levy is already levied on online advertisement, any provision for digital advertising space or any other facility or service for the purpose of online advertisement (as per the old laws).

iii. where sales, turnover or gross receipts of the e-commerce operator from the e-commerce supply and services is less than two crore rupees during the previous year.

Unlike the earlier Equalisation Levy which required the service recipient to deduct the levy, the new levy is to be collected by the e-commerce operator himself- making it altogether different from the earlier one. And also quite different from the concept of withholding tax.

The e-commerce operator is required to deposit the levy to the credit of the Indian treasury on a quarterly basis with any delay being subjected to additional interest and any default being subjected to penalty equal to the amount of equilisation levy.

The due dates for payment to be made by the e-commerce operator are put as under-

Quarter Due date
30th June 7th July
30th September 7th October
31st December 7th January
31st March 31st March

Looking at the above table, it is quite clear that it will have challenges for the operators to ascertain the levy for the last quarter i.e. 31st March as they will have to ascertain the liability on the same day i.e. 31st March itself and also pay. For making such payment, Income Tax Department has also amended the challan ITNS 285, pertaining to payment of equilisation levy by the deductor to the credit of Indian treasury- by adding another type of deductor in the name of- “e-commerce operator for e-commerce supply or services”.

The e-commerce operator is also required to submit an annual statement by 30th June following the year ending on 31st March of such year. If an e-commerce operator fails to file the annual statement within the specified date, an additional penalty of one thousand rupees per day of continuing default shall also be levied.

For making the above compliances relating to payment of tax and furnishing of returns, such e-commerce operators would also require Permanent Account Number (PAN) without which they wouldn’t be able to proceed further, which they might not have needed earlier when their incomes were not taxable in India.

This seems to be a burden along with an increasing compliance cost and increasing the time for finishing a particular transaction for the e-commerce operators out there as they will need to keep a track record of the continuous identification of application of such levy, tracing the IP addresses regularly, invoicing for the right amount, computation for levy, depositions, filing returns timely and even much more.

Since the advent of digitalization, every business person now aspires to move to the digital platform to capture a large audience and promote and sell their goods or services earning huge revenues without any physical presence in the country. Thus, even such businesses which do not even have a permanent establishment (PE) in India and were not liable to any tax earlier in India, would now be covered under the ambit of equilisastion levy if it has customers from India or even using an IP address in India.The new equilisation levy seeks to expand its realm by bringing to tax any sale of goods or services to such persons who uses an IP address of India. This covers all the possible scopes of taxing the non-residents e-commerce operators and leaving no room for their exit from the clause. Hence, all the large e-commerce platforms that are actively operating in the Indian market are likely to be covered keeping in mind the threshold limit.

The equilisation levy introduced vide Finance Act does not form part of the Income Tax Act, 1961. However, in order to avoid any sort of double taxation (i.e. services may be doubly taxed as fees for technical services, royalty, fees for included services etc and also attract the provisions of equilisation levy at the same time) there was very important to create a link between the two of them so that they do not overlap. Keeping in view the same, section 10(50) has already been held in place for the earlier known equilisation levy and now covers the new levy also. It provides solace to any such form of over lapping. Section 10(50) provides exemption to any such digital transaction from levy of Income Tax which has already been liable to equilisation levy at the rate of two percent or six percent.

The exemption under Section 10(50) for the new equilisation levy with respect to e-commerce operators is to come into force from 1st April 2021. However the new levy is already put into force from 1st April 2020. This leaves a room for over lapping leading to double taxation for one year and the operators need further clarification on this part.

As already discussed the levy is not covered under the Income Tax Act and hence non-resident companies that are falling in the ambit of the levy may not be able to claim any tax treaty benefits for the same in any due course.

Some businesses are however showing reluctance towards this levy and are waiting for more clarifications on the rules. It can be seen that tough the digitalization of economy has eased the business operational challenges on a much larger scale and lead to rising revenues, it has definitely created some taxability challenges. However conflicts are deemed to arise since such tax agreements and guidelines need acceptance globally which will take its own time and efforts from both- the Government and the citizens to adapt to the changing business and taxation models and one must expect challenges and changes in the near future with respect to this initiative of the digital taxation in form of equilisation levy.

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May 2024