Vide Finance Act 2020 Section 163(3) of Income Tax Act, 1961 has now been amended to provide that the Equalisation Levy would now be applicable also to ‘to consideration received or receivable for e-commerce supply or services made or provided or facilitated on or after the 1st day of April, 2020’. This amendment expands the scope of Equalisation Levy to any online sale or provision of services or their facilitation.
In 2016, India had first introduced an equalisation levy on payments received by non-residents (subject to certain conditions) for online advertising and allied services at the rate of 6%. The equalisation levy, which has now been widened, is in the backdrop of efforts by OECD (Organisation for Economic Co-operation and Development) and G20 nations to arrive at a consensus-based solution on taxing the digital economy appropriately where the value is created.
Chargeable to Whom?
The equalisation levy will be chargeable at 2% on consideration receivable by a non-resident “e-commerce operator” for “e-commerce supply or services” provided or facilitated by it on or after April 1, 2020. The India equalisation levy provisions apply very broadly.
Businesses within the scope of the 2% equalisation levy include, inter alia, online marketplaces; subscription-based platforms, including social media; cloud services; search engines; streaming services etc.The tax may also cover digital/online services provided by MNEs to their Indian group companies. Further, the equalisation levy is chargeable even on e-commerce transactions executed by non-residents if it is from an IP address located in India and on transactions between two non-residents for data collected from Indian customers.
An “e-commerce operator” is anyone who owns, operates, or manages a digital/electronic facility/platform for the online sale of goods or the provision of services or both. “E-commerce supply or services” is defined to mean the online sale of goods or services (including facilitation of the sale of such goods or services) by an e-commerce operator. For Eg Amazon The applicability of this 2% equalisation levy has also been defined to cover as wide a range of transactions as possible.
The equalisation levy will apply when a sale is made, or service is provided to either an Indian resident, or to any person who buys goods or services using an internet protocol (IP) address located in India, or to a non-resident in ‘specified circumstances.’ These ‘specified circumstances’ include firstly, the sale of advertisement targeting an Indian resident customer or a customer accessing the advertisement through an Indian IP address, and secondly, the sale of data collected from Indian residents or from persons who use an Indian IP address. Compliance obligations As against the earlier compliance burden of 6% equilisation levy on online advertising activities which was on resident service receipient this responsibility for ensuring compliance with the 2% equalisation levy provisions (including payment) lies with the non-resident e-commerce operator. Timelines The equalisation levy is required to be paid on a quarterly basis, and prescribed statements must be furnished annually. Penal Provisions Non-compliance with payment of the equalisation levy would attract interest at 1% per month and a penalty equal to the amount of the equalisation levy. Also, it is noteworthy that the payer can also be treated as a representative assessee (essentially like an agent) in the case of non-compliance with the equalisation levy.
Therefore, in contracts for e-commerce supply or services (chargeable to the equalisation levy), especially in the case of B2B transactions, payers would need to ensure enough safeguards are considered.
An “e-commerce operator” is specifically excluded from the 2% equalisation levy charge when
1) e-commerce operator has a permanent establishment (PE) in India and the e-commerce supply or service is effectively connected with this PE;
2) the transaction is of online advertisement and related activities where equalisation levy is leviable at 6%;
3) if the turnover of the e-commerce operator (on which the 2% equalisation levy is otherwise leviable) is less than INR 20 million during the financial year.
Will it lead to Double taxation?
Notably, the equalisation levy is not a part of the domestic income-tax law and is also levied beyond tax treaty provisions. Technically it is neither an income-tax nor indirect tax. Therefore, whether the equalisation levy will be considered as qualifying for a foreign tax credit will need to be evaluated based on the domestic law provisions of the country in which the foreign tax credit is sought to be claimed. Also, while payments chargeable to the new equalisation levy are also exempt from income tax, the exemption is applicable only from April 1, 2021.
Therefore, in the absence of any clarification, transactions at least until March 31, 2021, would be subject to both income-tax and equalisation levy, resulting in a double whammy. Going Ahead Businesses must take necessary action to reconfigure systems and processes to ensure compliance, considering that among other things, the equalisation levy applies when goods or services are bought online using IP address located in India. Since equalisation levy is technically not an income-tax nor indirect tax, it is important to look into the contractual terms, especially while conducting a due diligence, and also assess if there is any possibility to claim any foreign tax credit in the home country jurisdiction, as otherwise, it can result in a sunk cost. For now, businesses in the digital economy catering to customers based in India must factor in the impact of equalisation levy and take necessary steps to ensure compliance.