Abstract
The taxation of cross-border digital and e-commerce transactions has always been a huge trouble for the entire world, including India, since it has created endless ways for doing the business virtually from anywhere in the world without having any physical presence. To counter this, India brought the Equalisation Levy in 2016 to tax the non-resident businesses providing goods or services to Indian residents. Thereafter, India made certain amendments by introducing the concept of Significance Economic Presence and further widened the scope of Equalisation Levy in 2020 to include the e-commerce goods and services facilitated by the non-resident e-commerce operators within its ambit. The Finance Act, 2021 further introduced some amendments and clarifications, which were nevertheless not enough, to address some key issues.
The intend of the essay would be at first, to provide an overview of the Equalisation Levy and thereafter to analyse the scope of amended definition of the Equalisation Levy vide the Finance Act, 2020. Further, it deals with the concept of Significant Economic Presence and its interplay with the Equalisation Levy. Lastly, the essay aims to analyse the implications of the Equalisation Levy on the most-affected start-ups, small and medium business enterprises (SMEs) and the e-commerce operators due to the cost of double taxation and exhaustive compliance obligations which requires due consideration.
Introduction
The rapid advancement of technology and digitalisation worldwide has caused e-commerce businesses to grow exponentially. The digital vision of India is to reach $1 trillion of economic value of digital economy by 2025.1 By 2027, the projected growth of the Indian e-commerce market is predicted to rise over $ 200 billion2 and thus the importance of India’s due share of e-commerce tax cannot be overstated. Multinational corporations have found ways to circumvent the tax treaties and domestic laws to avoid paying taxes by establishing a connection in the tax heavens.3 This has led to the disparity in tax-treatment between the foreign and domestic players.
Initially, the Task Force for Digital Economy (“TFDE”) was constituted by the OECD’s Committee for Fiscal Affairs to address the broader tax challenges of the digital economy. The 2015 Action 1 Report of the TFDE noted that the digitalisation of businesses introduced new tax issues in terms of nexus, characterization and valuation of data and user combination. Notably, this report recommended three proposals for taxing the income of non-resident businesses, which were through (i) imposing a withholding tax, (ii) establishing an economic nexus, and (iii) Equalisation Levy.4
Pursuant to the Action 1 Report (2015), the Committee on Taxation of E-Commerce was constituted by the Indian Government in 2016. The task of the Committee was to examine the difficulties in taxation that emerge in the digital economy. The Committee submitted its findings and recommended Equalisation Levy to ensure tax neutrality among various businesses using various business models and residing either within or outside the taxing jurisdiction. This levy aimed to include and tax the non-resident entities which earns significantly from the Indian sourced income without having any physical presence in India.5
It is only thereafter that the Indian Government adopted the aforesaid recommendations and introduced the Equalisation Levy by inserting a Chapter VII in the Finance Act, 2016.6 Following India, several countries all over the globe, including UK, Brazil, Australia, Italy, France etc. have ratified similar tax regime (such as digital service taxes).
The intent behind the Equalisation Levy was to bring the non-resident businesses which are providing specified online services to Indian residents, under the purview of taxation. Further, Indian Government wanted to tax those non-resident businesses who have a close connection with the Indian market through their digital operations. All of this was in recognition of the principle that a non-resident business can do online business without having a physical location and for which, the government has a legal right for taxing such transactions.7
One of the shortcomings of existing tax regime was that the income of only those non-resident entities was taxable, who have the PE in India. The growth of technology and the digitalisation have opened the gates for the businesses to operate virtually from anywhere in the world even in the absence of any PE in India. Due to which, the developing countries such as India are losing revenue, which is stifling the growth of digital industries. This led to the introduction of the concept of ‘Significant Economic Presence’ vide the Finance Act, 2018. According to this provision, the non-resident business having a SEP in India will be considered to have a ‘business connection’ in India and therefore the income due to the SEP would now be taxable in India.8
However, the international and the domestic taxation regime seems to be outdated to keep pace with globalization and market liberalisation especially with respect to taxing e-commerce. India was at the forefront of losing the huge chunk of revenue from not taxing the non-resident e-commerce businesses considering the swift development of e-commerce market nationwide. To combat this, India widened the scope of Equalisation Levy in 2020, to include e-commerce goods and services within its ambit. However, the amended definition being widely worded, led to some unintended consequences especially on the start-ups and SMEs, all of which are discussed in detail in the later part of the essay.
2% Equalisation Levy
Equalisation levy is imposed on the consideration received or payable for any specified service or e-commerce supply or services.9 This levy initially, applied a 6% tax on the gross amount of consideration received by a non-resident from specified online services to either Indian residents or the non-residents having a Permanent Establishment (“PE”) in India. 10
As stated above that in 2020, the scope of Equalisation levy was widened to include nonresident e-commerce goods and services.11 The new levy is subjected to a 2% tax on the gross revenue received by a non-resident “e-commerce operator” from e-commerce supply or services.12 The term “e-commerce operator” has been defined as a non-resident that owns, operates or manages a digital or electronic facility or platform for online sale of goods or online provision of services.13 It may be noted that the term ‘e-commerce supply or service’, includes “online sale of goods” and “online provision of services”. 14 This implies that the new levy covers almost all the e-commerce transactions that takes place in India with effect from April 01st, 202015. Not only this, but this amendment also further brought the withholding tax on the domestic e-commerce transactions.
However, this new levy has been made inapplicable in the cases where (i) the non-resident business has a PE in India; or (ii) the transaction with respect to the online advertisement and other connected activities has been subjected to 6% Equalisation Levy; or (iii) gross-turnover of the e-commerce operator from the supply of e-commerce goods and services is less than INR 20 million.16
Scope of 2% Equalisation Levy
The 2% levy seems to be much wider in scope. The terms such as “e-commerce operator” and “e-commerce supply or services” are widely worded to include B2B as well as B2C transactions.17 For instance, a consumer typically visits the hotel’s website to make payments for reserving the room abroad. It is possible that such transactions may be included in the “online provision of services”. Likewise, online air tickets, online consultation, online marketplaces, cloud services, search engines, online gaming and streaming all may come within the scope of this definition.
Additionally, the interpretation of the “consideration received or receivable”, had put e-commerce operators in an uncertain position. It is difficult to ascertain whether the Equalisation Levy will be charged on the gross amount received by the operators or merely on the commission charged by such operator.18 The provision could be misinterpreted to put levy on the gross amount of consideration and not only on the commission that the e-commerce operator earns from such transactions. This could put an additional burden on the seller if the Equalisation Levy be charged on the gross amount.
Not only this, the Finance Act, 2021 further amended the term “online sale of goods” and “online provision of services” to include online activities namely (i) acceptance of offer for sale; (ii) placing of purchase order; or (iii) acceptance of the purchase order; or (iv) payment of consideration; or (v) supply of goods or provision of services, partly or wholly.19 This led to unintended complications. For instance, where an Indian resident purchases the goods from a non-resident e-commerce entity wherein the goods will be physically delivered to the Indian resident. If the existing rules of taxation be applied, this transaction would not have attracted tax in the absence of PE of non-resident e-commerce operator in India. However, after this expanded definition of “online sale of goods”, a mere online payment can be subject to Equalisation Levy.20
Apparently, the new levy seems to cover all payments for supply of goods or provision of services made to a non-resident e-commerce operator. Perhaps it would further cover the routine and inter-group transactions of the multinational corporations and their inter-group transactions such as IT support services between a foreign parent and its Indian subsidiary. 21 Also, a lot of transactions are undertaken between a foreign parent and its Indian subsidiaries/associates regularly for which no consideration is charged. Such services may have their own set of implications from the perspective of Indian transfer pricing regulations or the Goods and Services Tax (GST) and are taxed accordingly. It is not clear as if such services can be stretched to be covered with the definition of ‘consideration’ from the Equalisation Levy standpoint, although it seems that no Equalisation Levy should be chargeable in the absence of consideration.22
Concept of Significant Economic Presence (SEP)
Before going through the implications of 2% levy, it is important to understand the concept of SEP. As described above, India enacted the SEP through the Finance Act, 2018. This was based on the recommendations of the 2015 Action Plan 1 Report. The rationale behind SEP was to tax the Indian sourced income23 of the non-resident entities who do not a PE in India. Further, it was aimed to bypass the rulings of the Indian Courts wherein the Courts have consistently held that the business income of non-resident entity not having a PE, would not be taxable in India.24 The 2018 amendment made clear that the transactions or activities would create SEP even if the non-resident entities does not have the residence or place of business or provides services in India. However, these provisions came into effect from the financial year 2021-22 onwards.25
Whilst one may argue that due to SEP, the non-resident e-commerce businesses would now pay more taxes than what they would have paid if they had a PE in India. As a result of which, the non-resident e-commerce businesses like Facebook, based on news reports are considering of establishing a PE in India. This would in turn, not only raise the revenue of the Indian Government, but also invites other big market players to establish a PE in India. All of which will have a positive impact on the Indian economy.26
Nonetheless, the SEP has its far-reaching consequences since it includes goods or services provided from outside India thereby creating the SEP for such non-resident businesses, even though there may not be any activities undertaken by the non-resident in India. Further where the SEP is constituted, the non-resident e-commerce operators would be subjected to the burden of compliance obligations.
Double Taxation: An extensive roadblock?
The Equalisation Levy was added as a separate chapter in the Finance Act, 2016 and it is not a part of the Income Tax Act. This has led to a cumbersome situation for the non-resident businesses who might not be able to claim the foreign tax credits, or the tax treaty benefits at their home jurisdiction for the Equalisation Levy paid in India.27
The 2020 amendment has further worsened the situation instead of addressing the issue of double taxation. Moreover, this move was inconsistent with the recommendations of the OECD’s interim report on the taxation of digital economy in which the countries were urged to implement the interim measures in accordance with their tax treaties. 28
Due to the brunt of double taxation, the non-resident companies will have to shell out huge money towards the compliance of different taxes in different places. This implies that the cost of doing business will be increased in India as the e-commerce operators will now have the additional burden of tax, which has already been paid by them in India. Ultimately, the end-consumer will have to face its consequences since the e-commerce operators would pass the burden of taxes on them. For instance, Google has stated that it would transfer the burden of India’s Equalisation Levy to all its clients even in cases where the advertisements are visible in the country and the service recipient not being an Indian customer.29
Inter-play between SEP, Equalisation Levy and Royalty Provisions
Pursuant to the introduction of SEP, the issue arose with respect to the inter-play of taxability of the Equalisation Levy and the Income-tax provisions. It poses a question as to whether business income would be subject to both the Equalisation Levy and the Income-tax. If so, the non-resident businesses would have to bear the burden of double taxation. Interestingly, the threshold for the 2% levy and the clause (a) of SEP provisions is also the same at INR 20 million.30 To end this debate, the Finance Act, 2020 finally provided some clarification by exempting the income chargeable to Equalisation Levy from the income-tax.31 This would mean that now if the non-resident needs to pay 2% levy on the income from sale of goods, then no income-tax shall be payable for the same.
Further, after the 2% levy, another interesting issue came up with respect to the nexus of taxability of royalty/fee for technical services and the Equalisation Levy and further with the application of tax treaties. It raises a concern among the non-resident businesses with respect to the double taxation and further due to the difficulty in claiming the tax treaty benefits had the income be subjected to Equalisation Levy and not otherwise. To settle the position, the Finance Act, 2021 brought clarification to the extent that the Equalisation Levy shall not be levied where the payments are taxable as royalties or fee for technical services.32 This implies that the non-resident entities can claim the tax treaty benefits for income-tax paid in India on account of royalty or fee for technical services.33 This is seen as a welcoming decision which would prevent not only the unwanted litigation but also protect the double taxation of the same.
Implications of the 2% Equalisation Levy
The 2% levy was introduced to address the shortcomings of taxing the digital transactions of the virtual businesses. However, the ambiguities surrounding the terms “online sale of goods or services” and “consideration received or receivable” coupled with the inability of the e-commerce businesses to claim foreign tax credits in their home jurisdictions, have resulted in unnecessary complications.
This new levy further has the potential to impact even those businesses and business models who are not even operating through e-commerce platform. This would mean that any nonresident business conducting online sale of goods or providing services in India may come within the scope of this new levy. 34 This may have a major impact on the business models of e-commerce companies like Amazon and Flipkart.35
It may be noted that the Equalisation Levy is levied on goods and services provided to a person using an internet protocol (IP) address located in India. It is possible that the transactions between two non-residents may come under the category of Equalisation Levy, merely because of the usage of an Indian IP address. Perhaps the transactions concluded through the physical form would not be included but the same transactions concluded through the digital platform would be covered within the scope of Equalisation Levy. 36 For instance, a non-resident who is present in India and places an online order, using an Indian IP address, for the goods which are to be delivered at his overseas residence. It may be noted that this was in contradiction with the suggestions of the OECD, which had suggested to limit its application to such non-resident entities with a SEP in the country.37 Such an extra-territorial outreach will give rise to ambiguity and practical difficulties in terms of implementation. In such circumstances unnecessary burden of levy would be put on the e-commerce operators even without having any connection between India and such transactions. Even the e-commerce operators will be compelled to incur costs and put great efforts to ensure that they have sufficient means and infrastructure to identify and distinguish IP address.
Many stakeholders suggested that levy on the gross amount payable to the online advertising agency, has the potential of adding the total amount payable to the non-resident businesses. This may prove to be ineffective and could lead to economic crisis thereby negatively impacting the start-ups and small businesses.38
Additionally, the Indian businesses will have to make the payment of Equalisation Levy to any foreign company for the online service. This is an additional cost to the businesses. The levy sits outside the tax treaty system. Therefore, taxpayers cannot simply access tax credits to make up for the cost or obtain treaty benefits. As a result, foreign companies have turned to tax-protected contracts to shift the cost of complying onto domestic companies. The extra work around complying with the levy and negotiating rates with foreign companies is an additional cost for domestic businesses. It has increased the cost and the compliance burden.39
Conclusion
It is indisputable to mention that the purpose behind Equalisation Levy was to tax the digital economy, however the way it has been handled, it appears to have developed the characteristics of an indirect tax levy. For instance, the custom duty will be attracted on the goods which are purchased online and shipped to India. Such goods could attract both the custom duty as well as the Equalisation Levy. This raises another question of valuation for custom duty purposes i.e.as to whether the Equalisation Levy be included in the import value.
Further, the ambiguities of certain terms will continue to deter investors from extending support to the e-commerce companies. Hence, it is imperative to clarify the scope of “e-commerce operators” and “e-commerce supply and services” since they differ with the the suggestions of OECD Inclusive Framework.
It is believed that the Equalisation Levy will discourage investment and which in turn, would have a negative impact on the start-ups and SMEs. Moreover, the 2% levy has resulted in an increased tax burden on the Indian entities instead of the non-resident entities. Indian entities especially the start-ups and SMEs, doing business with the non-resident entities, will have to bear the costs and compliance burden of the Equalisation Levy.
Whereas, on the other hand, it may be argued that the 2% levy has been imposed only on those non-resident e-commerce entities, who do not have a PE in India. This means that the start-ups and SMEs would still have the access to the businesses with a physical presence in India or other businesses having economic connection in India. It is further argued that this move will not only raise the revenue for the Government, but the Indian territory will now be most favoured for the digital platform for advertising. This would encourage the non-resident
39 Josh White, ‘Domestic businesses take the hit from India’s equalisation tax’ businesses to start sending business to resident companies, which could elevate Indian e-commerce businesses to the forefront.
Nevertheless, it is suggested that the start-ups and SMEs must be exempted from the purview of Equalisation Levy. This must be done to protect their interest and further to ensure that the cost of the Equalisation Levy does not fall on these enterprises.
The practical issues and the challenges coming ahead for the Indian Revenue Authorities would be to bring the Equalisation Levy under the scope of tax treaty provisions so that non-resident businesses would be able to claim foreign tax credit on the same. Further, it is unclear as to what constitutes a digital or electronic platform. It could be argued that the online or telephonic consultation provided by a non-resident also comes under the e-commerce supply or services and thus, are subjected to Equalisation Levy. Lastly, the inter-company transactions are not exempted from the purview of Equalisation Levy. It would be interesting to see how the Indian tax authorities deal with the challenges and issues any clarification to bring an end over the debate.
Notes:-
1 Ministry of Electronics & Information Technology, ‘India’s Trillion-Dollar Digital Opportunity’, https://www.meity.gov.in/writereaddata/files/india_trillion-dollar_digital_opportunity.pdf
2 https://www.cnbctv18.com/retail/ecommerce-sector-to-touch-200-billion-by-2027-now-morgan-stanley-2331681.html
3 Aravind & Krishnan, ‘A detailed analysis of the Equalisation Levy’
4 OECD, ‘Addressing the Tax Challenges of the Digital Economy, Action 1: 2015 Final Report’
5 Committee on Taxation of E-Commerce, ‘Proposal for Equalisation Levy on Specified Transactions’ https://incometaxindia.gov.in/news/report-of-committee-on-taxation-of-e-commerce-feb-2016.pdf
6 India was the first country to introduce Equalisation Levy in 2016.
7 Ministry of Commerce & Industry, ‘India’s response to S 301 Report of US on Equalisation Levy’, https://pib.gov.in/Pressreleaseshare.aspx?PRID=1686865
8 Ajinkya, Mehta and Mundra, ‘Cross-border payments for purchase of software- An overview of direct tax aspects’, https://www.khaitanco.com/sites/default/files/2021-09/Software%20article%20-%20CTC%20ITJ%20June%202021.pdf
9 Finance Act, 2016, Section 164(d)
10 Modi, ‘Equalisation Levy and its effect on E-Commerce Operators’
https://taxguru.in/income-tax/equalisation-levy-effect-e-commerce-operators.html
11 Finance Act 2020, Section 153
12 Finance Act 2016, Section 165A
13 Finance Act 2020, Section 153(ii)(A)
14 Dhruva, ‘Equalisation Levy: Taxing Cross-border e-commerce transactions’ (February 2021); https://www.dhruvaadvisors.com/insights/files/Equalisation_levy_flyer.pdf
15 Dr. R. Sarvamangala and Farzana A., ‘A Comprehensive Analysis of digital taxation in India’ (2021) 11 SJCC Management Research Review.
16 Finance Act 2020, Section 165A(2)
17 Kenkre, ‘Expansion of India’s Equalisation Levy to impact more tech companies’ (Kroll); https://www.kroll.com/en/insights/publications/transfer-pricing/transfer-pricing-times-first-quarter-2021/expansion-of-indias-equalisation-levy-impact-tech-companies
18 Kapadia & Shah, ‘Taxing cross-border e-commerce transactions in India’, (International Tax Review) https://www.internationaltaxreview.com/article/2a6a5vgquljqsw93g7nr4/taxing-cross-border-e-commerce-transactions-in-india
19 Finance Act 2021, Section 171
20 https://www.thehindubusinessline.com/business-laws/wider-ramifications-of-equalisation-levy-20/article36813363.ece
21 Ajinkya, Mehta and Mundra, ‘Cross-border payments for purchase of software- An overview of direct tax aspects’ https://www.khaitanco.com/sites/default/files/2021-09/Software%20article%20-%20CTC%20ITJ%20June%202021.pdf
22 Singal and Kapoor, ‘Equalisation Levy- The Challenged ahead for India’s DST’ (International Tax Review) https://www.internationaltaxreview.com/article/2a6a66eh04saxacspperk/equalisation-levy-the-challenges-ahead-for-indias-dst
23 ‘India: Significant Economic Presence – Paradigm shift in new Nexus Rules’ https://www.roedl.com/insights/india-economic-presence-sep-nexus-rules-digitalization-business#:-:text=Concept%20of%20SEP,-A%20SEP%20is&text=It%20has%20further%20been%20clarified,in%20India%20would%20be%20taxable
24 See Google India (P) Ltd. v. Joint Director of Income-tax (International Taxation) Range-1, Bengaluru, reported in (2018) 93 taxmann.com 193 dated 11.05.2018.
25 ‘India: Significant Economic Presence – Paradigm shift in new Nexus Rules’ https://www.roedl.com/insights/india-economic-presence-sep-nexus-rules-digitalization-business#:-:text=Concept%20of%20SEP,-A%20SEP%20is&text=It%20has%20further%20been%20clarified,in%20India%20would%20be%20taxable
26 ‘Equalisaton Levy: The law as it stands in India’ the SEP is constituted, the non-resident e-commerce operators would be subjected to the burden of compliance obligations.
27 Kapadia & Shah, ‘Taxing cross-border e-commerce transactions in India’, https://www.internationaltaxreview.com/article/2a6a5vgquljqsw93g7nr4/taxing-cross-border-e-commerce-transactions-in-india
28 OECD, ‘Interim report on the tax challenges arising from digitalisation’ (2018) https://www.oecd-ilibrary.org/docserver/9789264293083-en.pdf?expires=1672949342&id=id&accname=guest&checksum=0D2A50D0FE5CBCEB23465B17E60BAC69
29 Sachin Dave, ‘Google to pass on ‘Google Tax’ from October’ Economic Times (2021), https://economictimes.indiatimes.com/tech/technology/google-to-pass-on-google-tax-from-october/articleshow/84838210.cms
30 Ajinkya, Mehta and Mundra, ‘Cross-border payments for purchase of software- An overview of direct tax aspects’
31 See Section 10(50) of the Income-tax Act, 1961
32 Finance Act 2021, Section 171(a)(i)
33 KPMG, ‘India: Tax withheld reduced by “equalisation levy” (digital services tax) paid (court decision)’ https://home.kpmg/us/en/home/insights/2022/02/tnf-india-tax-withheld-reduced-equalization-levy-paid.html#:~:text=The%20Finance%20Act%20of%202021,of%20any%20relevant%20tax%20treaty.
34 Kenkre, ‘Expansion of India’s Equalisation Levy to impact more tech companies’ (Kroll) https://www.kroll.com/en/insights/publications/transfer-pricing/transfer-pricing-times-first-quarter-2021/expansion-of-indias-equalisation-levy-impact-tech-companies
35 IP Address: A technical conundrum? – https://www.ictd.ac/blog/equalization-levy-non-resident-ecommerce-india-block-foreign-players/
36 Kapadia & Shah, ‘Taxing cross-border e-commerce transactions in India’
37 IP Address: A technical conundrum? – https://www.ictd.ac/blog/equalization-levy-non-resident-ecommerce-india-block-foreign-players/
38 Student Advocate Committee, ‘The Xth NLSIR Symposium on “Regulating E-Commerce in India” – A Transcription’, [JSTOR, National Law School of India Review, National Law School of India Review Vol. 29, No. 2 (2017)]
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