THE ISSUE:
The issue of getting around to tax digital world has been going on for substantial time now. As has been quoted many a times that with rapid digitalization, geographical boundaries have blurred and cross border trade takes place at a click of a mouse. Artificial intelligence is fast emerging to the extent that some have become apprehensive that the machine may take over the human race.
Nevertheless, digitalization has increased the convenience and ease to a level that it has become necessity and its advancement can only be encouraged in quest to take it to another level. But obviously commerce and trade have adopted technology to their best advantage and suddenly the markets have opened up and are not just confined to any region or territory. Digitalized stores or webstores aided with digitalized payment systems have taken over the conventional system of trade and commerce without any requirement of physical proximity to the market.
This rapid change in digitalization has brought about disruption in many ways and taxing such digitalized transaction is one such challenge that the Governments all over the world are pondering over. The basic elements of allocation of cross border taxation rights rested on nexus and physical presence hold no longer valid in the present digitalized arena. OECD is working on this issue for quiet some time but has not been able to bring about any consensus solution so far in spite of according it the top priority under BEPS project 1 of the inclusive framework.
Until a consensus framework for taxing digitalized transaction is put in place, economies continue to loose revenue as these transaction go scot free in the culminating economy in cross border transactions. Government of India, in its quest to bring such transaction within the tax net, introduced Equilisation Levy in 2016 by way of introducing Chapter VIII in the Finance Act,2016 on the basis of recommendation of Committee on Taxation of e-commerce set up by the Ministry of Finance.
RATIONALE:
Neutrality, efficiency, certainty & simplicity, effectiveness & fairness, flexibility and equity are basic fundamental principle which must reflect in any tax policy. The Committee while recommending Equilisation Levy lay much emphasis on Neutrality which is so noted in the Committee’s Observation in para 38 of the Report:
“39. Taking the aforesaid issues related to tax neutrality into account, the Committee is of the view that the asymmetry in tax burden faced by purely domestic and multi-national enterprises can have distortionary impact on the market competition and can adversely affect the development of purely domestic enterprises. The clear tax advantage faced by foreign enterprises over their Indian counterparts also creates strong incentives for Indian enterprises to either locate themselves in a low tax jurisdiction outside India or sell their businesses to such an enterprise. Thus, distortionary taxation arising from the limitations of existing international taxation rules and the lack of tax neutrality are likely to pose significant constraints in development of Indian digital industry, and thereby pose significant long term challenges for this extremely important sector of economy.”
Further, the Committee observed that taxation on the basis of Permanent Establishment rule as it exist today in Double Tax Avoidance Agreement(DTAA) whereby weightage is accorded to “Fixed place of business” may prove to be hindrance in taxing cross border digitalized transaction. The Committee observed in Para 53 & 54 of the Report as under:
“53. In view of the extensive analysis of these aspects provided in the BEPS Report on Action 1 and the observations made above, the Committee is of the view that the physical presence based threshold for taxing income in the economy from where the payments arise, was conceptualized in an era when it reasonably indicated the significant economic presence of an enterprise in the economy of a jurisdiction. The evolution of the definition of permanent establishment, both in terms of its interpretation, as well as in terms of alternate conditions that give rise to it, is an evidence of the adaptation of this rule to the evolving ways in which business conducts itself. It signifies the dynamic evolution of taxable nexus with business modes, and justifies its further evolution to the needs of new business models of digital economy.
- At the same time, the lack of universal acceptance of a single definition of permanent establishment rule and the divergence in the preference for attribution rules indicates a wedge between preferences of different countries that may not be easy to fill up. In this light, the gross taxation of payments in the jurisdiction where they arise, at a concessional rate of tax, offers a potential option that has already been relied in tax treaties as an alternative to the permanent establishment based rule. In broad terms, both these alternatives allocate taxing rights to jurisdictions that contribute to the profitability of an enterprise by way of demand or supply side factors provisioned by public resources belonging to that jurisdiction.”
Also the Committee expressed concern as to the applicability of present set of rules relating to nexus and characterization of income on taxing cross border digitalized transaction which is stated in para 76 of the Report as under:
“76. The continuing ambiguity related to nexus and characterization of the payments have the potential of giving rise to tax disputes, particularly in countries like India, where the tax treaties allocate taxing rights to the source jurisdiction position of OECD, which does not prefer allocating taxing rights to source jurisdiction on royalty and fee for technical services payment and developing countries like India, which have tax treaties providing such rights to source jurisdictions are taken as an indication, it may be difficult, if not impossible, for the international community to arrive at a consensus on these issues, anytime soon. The resultant ambiguity, uncertainty and unpredictability can develop as a significant constraint for the expansion of digital economy in India. This makes an important case for finding a solution to all these issues, in the form of a simple, clear and predictable tax rule that unambiguously defines the tax liability of digital enterprises, thereby facilitating their business planning, reducing their tax risk and contingent liabilities, while also reducing compliance costs, disputes and administrative burden.”
Thus considering the difficulties posed in bringing to tax cross border digitalized transaction under present set of rules enshrined in the DTAA and that the provisions of DTAA override provisions of Income Tax Act, the Committee recommended Equilisation Levy on Gross value and that the same be promulgated separately without incorporating the same in the Income Tax Act. The recommendations set out by the Committee are listed in para 123 of the Report which reads as under:
“123. In view the above considerations, the Committee is of the view that there is a need to consider the feasibility of adopting the ‘Equalization Levy’ under domestic laws of India to address the tax challenges arising from the digital economy at this stage. The Committee is also of the view that adopting such a measure at this stage will bring greater certainty and predictability to all the stakeholders, enable them to take it into account while making their future business plans and pricing of products, and thereby contribute to a more stable tax environment in India for digital economy.”
Thus based on the above recommendation of the Committee, the Government introduced a new set of tax rules for cross border e-commerce transaction to be called Equilisation Levy
PROVISIONS INTRODUCED IN 2016
Following the recommendation of the Committee, Government of India introduced Equilisation Levy by way of incorporating a separate chapter VIII in the Finance Act,2016 and not as a part of Income Tax Act,1961 and this was done conspicuously so as to keep the Levy outside the scope of Income Tax Act. The reason being that such a Levy if considered as Income Tax then it would fail to stand the test of nexus and characterization when read with DTAA.
Thus section 163 to 180 of the Finance Act,2016 along with rules notified in this regard govern and lay down the scope, charge and mechanism. In a nutshell, this levy seeks to tax e-commerce transaction pertaining to online advertisement @ 6% of the Gross value.
Some of the important aspects as provided under the provisions are as under:
Section 164 provides definition of various terms, some of them are defined as under:
“Equilisation Levy” is defined to mean the tax leviable on consideration received or receivable for any specified service under the provisions of this Chapter.
“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;
“permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on;
“Specified service” means 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;
Section 165 is a charging section and provides that there shall be charged an equalisation levy at the rate of six per cent of the amount of consideration for any specified service received or receivable by a person, being a non-resident from—
| (i) | a person resident in India and carrying on business or profession; or | |
| (ii) | a non-resident having a permanent establishment in India. |
(2) The equalisation levy under sub-section (1) shall not be charged, where—
| (a) | the non-resident providing the specified service has a permanent establishment in India and the specified service is effectively connected with such permanent establishment; | |
| (b) | the aggregate amount of consideration for specified service received or receivable in a previous year by the non-resident from a person resident in India and carrying on business or profession, or from a non-resident having a permanent establishment in India, does not exceed one lakh rupees; or | |
| (c) | where the payment for the specified service by the person resident in India, or the permanent establishment in India is not for the purposes of carrying out business or profession. |
Collection and recovery of equalisation levy.
166 . (1) Every person, being a resident and carrying on business or profession or a non-resident having a permanent establishment in India (here in this Chapter referred to as assessee) shall deduct the equalisation levy from the amount paid or payable to a non-resident in respect of the specified service at the rate specified in section 165, if the aggregate amount of consideration for specified service in a previous year exceeds one lakh rupees.
(2) The equalisation levy so deducted during any calendar month in accordance with the provisions of sub-section (1) shall be paid by every assessee to the credit of the Central Government by the seventh day of the month immediately following the said calendar month.
(3) Any assessee who fails to deduct the levy in accordance with the provisions of sub-section (1) shall, notwithstanding such failure, be liable to pay the levy to the credit of the Central Government in accordance with the provisions of sub-section (2).
Section 166 to 180 of the Finance Act, 2016 deals with various issues including appeal, penalty and prosecution and also seeks to implement the Equilisation Levy through the administrative machinery of Income Tax. Further, various provisions under the Income Tax Act are made applicable mutatis mutandis and also makes provision that wherever term is not specifically defined then the meaning and definition under the income Tax Act shall be assigned to such term.
ENLARGING THE SCOPE OF EQUILISATION LEVY:
Finance Act,2020 extended the scope of Equilisation Levy (Levy 2) by making amendment to the Finance Act,2016 and effective 1st April,2020 it is applicable to non-resident e-commerce operator for online supply of services or online sale of goods to residents or in some circumstances even to non-residents. Salient feature of Levy 2 is a s under:
Section 165A inserted which reads as:
(1) On and from the 1st day of Apirl, 2020, there shall be charged an equalisation levy at the rate of two per cent. of the amount of consideration received or receivable by an e-commerce operator from e-commerce supply or services made or provided or facilitated by it—
- to a person resident in India; or
- to a non-resident in the specified circumstances as referred to in
sub-section (3); or
- to a person who buys such goods or services or both using internet protocol address located in India.
(2) The equalisation levy under sub-section (1) shall not be charged—
(i) where the e-commerce operator making or providing or facilitating e-commerce supply or services has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment;
(ii) where the equalisation levy is leviable under section 165; or
(iii) sales, turnover or gross receipts, as the case may be, of the e-commerce operator from the e-commerce supply or services made or provided or facilitated as referred to in sub-section (1) is less than two crore rupees during the previous year.
(3) For the purposes of this section, “specified circumstances” mean—
(i) sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India; and
(ii) sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India.’;
166A. The equalisation levy referred to in sub-section (1) of section 165A, shall be paid by every e-commerce operator to the credit of the Central Government for the quarter of the financial year ending with the date specified in column (2) of the Table below by the due date specified in the corresponding entry in column (3) of the said Table:
| Serial number | Date of ending of the quarter of financial year | Due date of the financial year |
| (1) | 30th June | 7th July |
| (2) | 30th September | 7th October |
| (3) | 31st December | 7th January |
| (4) | 31st March | 31st March |
Meaning to E-commerce operator, e-commerce supply or services has been assigned vide inserting clauses in Section 163 as under:
‘(ca) “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;
(cb) “e-commerce supply or services” means—
(i) online sale of goods owned by the e-commerce operator; or
(ii) online provision of services provided by the e-commerce operator; or
(iii) online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
(iv) any combination of activities listed in clause (i), (ii) or clause (iii);’
The major differences between Equilisation Levy on online advertisement (Levy 1) and on line sale of goods or provision of services(Levy 2) is tabulated hereunder:
| Particulars | Levy 1 | Levy 2 |
| Scope | Online advertisement | Online sale of goods or provision of services |
| Rate | 6% | 2% |
| Person Responsible | Payer(Resident) by way of witholding | Payee (Non-resident) |
Consequent amendments were made in the Income Tax Act vide clause 50 of Section 10 to provide for exempting income arising out of transactions on which Equlisation Levy is chargeable.
CHALLENGES:
However, several challenges may arise in implementing the law, some of which are enumerated below:
TAX ISSUES: Some of the issues that may arise in are:
- Non-resident may seek to be covered under Equilisation Levy for on line services which may otherwise fall within the ambit of Fee for Technical services under the provisions of DTAA and thus get away by paying lower amount. (However, it is pertinent to mention here that the issue was raised before Bangalore ITAT in the case of Google India Ltd. ((2018) 93 Taxmann.com 183) whereby it was held that where copyright, IPR or other intangibles are applied then the nature of services will continue to be that of attracting Royalty.)
- Conversely, non-resident may land up paying Equilisation Levy and Income tax particularly in a situation where it is so held that Income tax is leviable instead of Equilisation Levy or Equilisation Levy is payable in addition to the Income Tax. It is pertinent to note that exemption is provided under Income Tax Act where Equilisation Levy is payable, but no such exemption is provided under the Equilisation provisions.
- Equilisation Levy is not attracted where online sale of goods or provision of services, as envisaged under the provisions, does not exceed Rs. Two crores during the “previous year”. Since there is no concept of Assessment or Assessment Year under Equilisation Levy and therefore previous year here would mean preceding year. Under the circumstances, e-commerce operator may find difficult to compile data for 2019-20 as the requisite information may not be available.
- The definition of “online” is very broad and may seek to cover communication over emails or telephones as well. Further, in case the supplier also happens to maintain or own website selling goods or providing services then such sale or supply shall also be exigible to Equilisation Levy. This in effect means that all non-resident supplying goods or providing services to persons resident in India and maintaining a website shall be required to pay Equilisation Levy to the Government of India if contract has taken place through email, website or portal. For example, all the hotels who get online booking form Indian resident would be required to pay Equilisation Levy to Government of India?
- There are no clarification for adjustments in case of return of goods or discount provided.
- It would be difficult to keep track by non-resident e-commerce operator to whom he is selling or providing services particularly if the sale or services is taking place outside India with a resident of India while he is travelling.
- It may not be feasible for Government to exercise extra territorial jurisdiction for transaction taking place between two non-residents which are sought to be covered under Levy 2.
Effectiveness and fairness is one of the basic principle of taxation which the policy makers must keep in mind while trying to innovate any new taxation regime. This principle enshrine that taxation should produce the right amount of tax at the right time, while avoiding both double taxation and unintentional non-taxation. Serious doubts are apprehended in effectively implementing provision under Levy 2 particularly the application of the provision for commercial transaction amongst non-resident taking place outside the country for selling data pertaining to Indian customers. There is no mechanism to track or verify such transaction and this may be unfair to the enterprise who complies honestly. This principle is taken into account by the Task Force of OECD working on evolving taxation rules in digitilised arena that if there is a class of taxpayers that are technically subject to a tax, but are never required to pay the tax due to inability to enforce it, then the taxpaying public may view the tax as unfair and ineffective. As a result, the practical enforceability of tax rules is an important consideration for policy makers.
CONSTITUTIONAL VALIDITY of the Act as promulgated by the Government is highly doubtful. Article 51, as part of Directive principle of State Policy, of the Constitution provides that “the state shall endeavour to foster respect for international law and treaty obligations in the dealings of organised peoples with one another; and encourage settlement of international disputes by arbitration”. The constitution recognises and enshrine respect and obligatiojn accorded to international agreements and such a provision which seek to override the DTAA may not be seen in compliance with this Article.
TREATY OVERIDE: Further, although Government has made attempt to not to bring it within the ambit of income tax by stating that Equilisation Levy is a transaction tax on and not on income, but going by the intent of the Government and corelating it with various provisions that already exist in Income Tax Act whereby tax is charged on Gross value of the transaction under presumptive method like section 44AD or 44B etc or even under DTAA like Royalty or Fee for Technical services, it may be considered as part and parcel of Income Tax and an attempt to override the treat provisions. If it is so considered then DTAA provisions will apply and once again nexus test will have to be passed to bring such transaction to tax. Also discriminatory clause may be invoked under DTAA.
CONCLUSION:
It is understood that Government of India had to resort to this unilateral approach of bringing digitalised transaction within the tax base as it was being felt that India is one of the largest market and while the overseas e-commerce operator continue to generate income but the country is deprived of the due share of tax in the absence of taxation regulations in consonance with the new order of digitalised transaction. This frustration on loosing revenue is recognised by OECD whereby it is sated in the Report that “Growing discontent among countries has catapulted these issues to paramount importance and the urgency to act has left governments in search of effective responses.”
OECD seems to also recognise that if consensus based regulations are not adopted at the earliest then some countries might initiate unilateral actions but also cautioned that such patchwork of unilateral actions, which in a fragile global economy, would harm investment and economic growth hampering the ability of governments to collect revenues and invest in programmes.
No doubt that there is absolute need to bring in some order to regulate and charge tax on digitalised transactions but fundamental foundation of taxation for any economy must also enshrine the principle of recognition of certainty and equity amongst all the stakeholders. Moreover, the timing of bringing in Equilisation Levy 2 is absolutely not in consonance with the current situation wherein all the world has come to halt and is countering a grave situation of COVID-19. Under the circumstances, the Government ought to have deferred the implementation of Equilisation Levy 2 as has been done in respect of various other provisions under various Acts. This would have given some time to e-commerce operator to align their system accordingly.
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