Article explains Taxation of Online Advertisement Prior to Equalisation Levy, Introduction of Equalisation levy at 6 % for online Advertisement, Exception to Equalisation levy on Online Advertisement, Equalization levy at 2% on E- Commerce Transaction, Exception to Equalisation levy on Ecommerce transaction, Exemption under Income Tax Act for Transaction subject to equalisation levy and TDS on E-Commerce Transaction.

Introduction:

The growth in information and technology sector has given rise to E- Commerce model of business transaction. Electronic Commerce could be said to comprise commercial transactions, whether between private individuals or commercial entities, which take place in or over electronic networks.

Taxation of a digital transaction has always remained a complex issue for many countries. There has been great difficulty in collecting revenue from vendors conducting commerce through foreign internet addresses. It was difficult for any country to bring the digital transaction under taxation net due to the concept of physical presence and nexus principle. In order to overcome the lacuna many countries have taken various steps to bring the digital transaction under the taxation net. The concept of taxation of digital / E-Commerce transactions is evolving all over the World. In this article, we will have a bird’s eye view of the scope of digital transaction under the taxation net.

Digital Transaction

Taxation of Online Advertisement Prior to Equalisation Levy

The only category of cases where creation of a Permanent establishment has constantly been upheld is those relating to computer reservation systems used by the travel industry.[1] Other cases such as E Bay International Ag, Mumbai v. Assessee [2] have held that there is no Permanent Establishment, even when an e-commerce website carried on substantial activities in India and was supported by collection agents situated in India

In  ITO v. Right Florists Limited[3], the Tribunal in this case was presented with the question of taxability of payments made by an Indian resident to Google and Yahoo for advertisement services rendered through their respective search engines. The Hon’ble Tribunal held such payments were not taxable in India because such payments would not be considered to be fee for technical services (“FTS”) in the absence of human intervention in the course of provision of services.

[4]The ITAT Bangalore has held that made by Google India to its overseas affiliate for the purchase of advertisement space (under Google’s Adwords programme) for further resale to Indian advertisers as royalties. The appeal is pending before Karnataka High Court.

Introduction of Equalisation levy at 6 % for online Advertisement

In order to overcome the lacunae discussed above, in the Finance Act, 2016 the concept of equalisation levy was introduced. Section 164 (d) of Finance Act 2016, defines “equalisation levy means the tax leviable on consideration received or receivable for any specified service under the provisions of this Chapter.”According to 164 (g) of Finance Act, 2016 “permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on”[5]

According to Section 165 of Finance Act, 2016 an equalisation levy of 6 % of the amount of consideration is payable by non- resident for online advertisement or any provision for digital advertising space or any other facility or service for the purpose of online advertisement service received from the services of resident carrying on business or profession in India.

Exception to Equalisation levy on Online Advertisement

According to 165(2) of Finance Act, 2016 Equalisation levy is not applicable where:

  • The provider of service being non –resident has permanent establishment which is connected to the online advertisement service or any provision for digital advertising space or any other facility or service provided by the non-resident
  • The aggregate consideration for the Online advertisement or any provision for digital advertising space or any other facility or service is not beyond Rs. 1,00,000/-
  • Where the payment by the resident in India or Permanent establishment in India is not for the purpose of carrying business or profession.

Due Date of Payment

According to Section 166 of the Finance Act, 2016 equalisation levy deducted must be paid within 7th of next calendar month and report about equalisation levy must be furnished by submitting Form 1.

Interest and   Penalties.

According to Section 170   and Section 171   of   Finance Act 2016, person who fails to remit the equalisation levy deducted, to the government   shall pay simple interest at the rate of one per cent of such levy for every month or part of a month by which such crediting of the tax or any part thereof is delayed and will be liable to pay penalty of Rs.1000 every day subject to the maximum of amount of equalisation levy until the amount collected is remitted to the Government.

According to Section 171 of Finance Act 2016, if the person fails to deduct the equalisation levy then he will be liable to pay the amount of equalisation levy which he fails to deduct as penalty.

Penalty for furnishing wrong Statement

According to Section 172 of Finance Act 2016, if an assessee fails to furnish the statement within the time, penalty of one hundred rupees for each day during which the failure continues will be levied.

According to Section 173 of Finance 2016, penalty under Section 171 and 172 are not to be imposed if the assessee proves to the satisfaction of the Assessing Officer that there was reasonable cause for the said failure

Appeal

According to Section 174 and 175 of Finance Act, 2016, an assessee can appeal against the penalty imposed before the Commissioner of Income Tax (Appeals) and Tribunal .It must be noted that the penalty orders are only the subject matter of appeal and one cannot appeal against levy of equalisation levy as not applicable. In those cases the only resort is filing writ Petitions before High Court.

Equalization levy at 2% on E- Commerce Transaction

[6]Section 165A is inserted vide Finance Act, 2020 with effect from 01.04.2020 According to which an equalisation levy of 2% is charged on the consideration received by the  E-Commerce Operator  from e-commerce supply or services made or provided or facilitated by it:

(i) to a person resident in India; or

(ii) to a non-resident in the specified circumstances as referred to in specified circumstances.

Specified Circumstances means

  • 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
  • Sale of data, collected from a person who is resident in India or from a person who uses internet protocol addresses located in India or to a person who buys such goods or services or both using internet protocol address located in India.
  • to a person who buys such goods or services or both using internet protocol address located in India.

The Term E-Commerce Operator and E commerce supply is defined in Section 153 of Finance Act 2020 vide inserting Section 164 ‘(ca) and Section 164(cb) in Finance Act 2016.According to Section 164(ca) of Finance Act “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;

Section 164 (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).

Exception to Equalisation levy on Ecommerce transaction

Equalisation levy shall not be charged   where –

  • e- Commerce operator has permanent establishment in India such e-commerce supply or services is effectively connected with.
  • Where the equalisation levy is leviable for online advertisement.
  • Sales, turnover or gross receipts, of the e-commerce operator from the e-commerce supply or services is less than two crore rupees during the previous year.

Due Date of Payment.

According to Section 166A of the Finance Act, the equalisation levy shall be paid by the e- commerce Operator quarterly. The due date of  payment are as follows:

Date of ending Quarter of Financial year Due Date of Payment
30th June 7th July
30th September 7th  October
31st December 7th  January
31st March 31st March

Exemption under Income Tax Act for Transaction subject to equalisation levy 

Section 10 (50) exempts any income arising from specified service chargeable to   equalisation levy vide Finance Act 2016. The Finance Act 2020, amends section 10 (50) and also provide exemption of income from any E-Commerce supply or services made or provided or facilitated on or after the 1st day of April, 2021.From the above provision we can ascertain that equalisation levy on E-Commerce operators is applicable from 01.04.2020 and the corresponding exemption of equalisation levy in respect to E-Commerce operators under Income Tax is applicable only from 01.04.2021. Penalty and Appeal section stated above for equalisation levy on online advertisement is applicable to equalisation levy on E-Commerce Operator.

TDS on E-Commerce Transaction

Section 194O was inserted in Income Tax Act vide Finance Act, 2020.This section will come into effect from  1st October 2020.According to Section 194O of Income Tax Act, E- Commerce Operator is liable to deduct TDS of 1% for sale of goods/provision of services facilitated by it through its digital platform. Such tax has to be withheld on the gross amount of sales/service.

According to Section 206AA of Income Tax Act inserted vide Finance Act, 2020, in case of non-availability of a permanent account number (Indian income tax registration) of the e-commerce participant, the withholding tax rate would be increased to 5%.

The term Electronic Commerce, E-Commerce Operator, E commerce Participant and Service for the purpose of this Section is given under explanation to Section 194 O.

The extract of the Explanation is as under

—For the purposes of this section,—

(a) “electronic commerce” means the supply of goods or services or both, including digital products, over digital or electronic network;

(b) “e-commerce operator” means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce;

(c) “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;

(d) “services” includes ‘‘fees for technical services’’ and fees for ‘‘professional services’’, as defined in the Explanation to section 194J.

Threshold Limit

TDS under Section 194O of Income Tax Act is not applicable to e-commerce participant, being an individual or Hindu undivided family, where the gross amount of such sale /services or both during the previous year does not exceed five lakhs rupees and such e-commerce participant has furnished his Permanent Account Number or Aadhaar number to the e-commerce operator. The detail guidelines  regarding this is yet to be notified.

OECD Guidelines

BEPS Action Plan 1 in 2015 focused on Tax challenges of the digitalization economy however no consensus could be reached on methodology of taxation. The Task Force on the Digital Economy (TFDE), the BEPS Action plans recommended implementation of the three options ensuring that the country does not violates its treaty obligations. The three options are as follows:

i. New nexus in the form of Significant economic presence

ii. A withholding tax on certain types of digital transactions; and

iii. Equalisation Levy.

[7]OECD issued proposals for addressing the challenges of digitised economy into two pillars namely:

  • Pillar One –Unified Approach towards reallocation of profit and revised nexus rules
  • Pillar Two- Global Anti-base Erosion Mechanism.

The Unified Approach proposes a three-tier profit allocation mechanism in that one of the mechanisms proposed is profit allocated to market jurisdiction in absence of physical presence arrived by calculating deemed residual profit.

The OECD has set the deadline as December 2020 to come out with the consensus based solution to taxation of cross-border digital transactions.

OTHER COUNTRIES PRACTICE 

France

The digital services tax is imposed at a rate of 3% on the gross revenues received from intermediary services and advertising service using digital interface.

Hungary

Hungary implemented equalisation Levy 6% Gross amount of online advertising payments in 2016.From October 2020 1% of Withholding tax on Gross amount of sale of goods / provision of service facilitated through digital or electronic facility or platform will be imposed. From April 2022, it is going to tax revenue related to the “digital PE”.

Italy

In 2020 budget, Italy also introduced Digital Service tax of 3 % on digital advertising, data transmission and intermediately services. Spain also introduced Digital Service Tax of 3 %.

Indonesia

Corporate Income Tax payable by deeming “PE” of overseas e-commerce companies which have a significant economic presence in Indonesia. Electronic Transaction Tax will be imposed on sales to Indonesian buyers/users if the Permanent establishment concept cannot be applied based on specific provisions of a Tax Treaty.

Japan

Japan under 2015 tax reforms has introduced a consumption tax on digital transactions under reverse charge mechanism.

Malaysia

From 2019, withholding tax is levied on any income in relation to e-Commerce transactions is deemed to be derived from Malaysia.

United Kingdom

United Kingdom retroactively from 1st April 2020 levied 2% tax on the revenues of search engines, social media platforms and online marketplaces which derive value from UK users.[8]

Conclusion

From the above it is clear that there must be change in fixed permanent establishment concept for taxing the cross- border digital transaction. The step taken by India, in introducing equalisation levy which is applicable from 01.04.2016 for online advertisement and for E- Commerce Operator applicable from 01.04.2020, Tax Deduction at Source applicable from 01.10.2020 and amendment to Section 9 by bringing Significant economic presence which is yet to come into force are temporary measures taken based on recommendation of BEPS Action plan. Applicability of exemption on E-commerce supply is exempt from Income Tax is only from 01.04.2021, whereas levy of 2% equalisation levy is charged on the consideration received by the  E-Commerce Operator  from e-commerce supply or services is applicable from 01.04.2020. This issues needs to be addressed and exemption from Income Tax must be made applicable from 01.04.2020.Compliance burden will be increased for E- Commerce Operator.

The scope of Advance Ruling must be extended to equalisation levy also. The scope of Appeal must be extended even to subject of applicability of equalisation levy to a transaction. Treaty benefit can also be extended to equalisation levy or solution must be derived to ensure that same transaction is not taxed twice and at the same time the transaction is not escaped from taxation. Method of arriving residual profit shall be audited and accuracy of calculation must be certified by independent auditors. Alternatively for easy tax administration, adhoc percentage of tax on the gross profit of supply of goods/ service or both may be shared at agreed percentage between the country where there is physical presence and where there is only digital presence. Let us wait for the consensus to be arrived by the OECD to find a permanent solution in arriving at the method of taxation of cross border digital transaction.

Notes: 

[1] Galileo International v. DCIT (2008) 19 SOT 257 (Del.) and Amadeus Global Travel v. Deputy Commissioner Income Tax (2007) 113 TTJ 767 (Del.).

[2] ITA No. 6784/M/2010

[3] 2013] 32  taxmann.com 99 (Kolkata – Trib.)

[4] 2018] 93 taxmann.com 183 (Bangalore – Trib

[5] https://www.cbic.gov.in/resources/htdocs-cbec/fin-act2016.pdf

https://taxguru.in/finance/finance-act-2020.html

[7] https://www.oecd.org/tax/beps/public-consultation-document-secretariat-proposal-unified-approach-pillar-one.pdf

[8] https://tax.kpmg.us/content/dam/tax/en/pdfs/2020/digitalized-economy-taxation-developments-summary.pdf

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2 Comments

  1. Renuka Murali says:

    Well explained. Many doctors use PRACTO an online platform to advt and book appts. Will equalisation levy apply to such transactions.
    Should the dr deduct tax when making pymts

    1. Gayathrisankaran says:

      Mam,
      “Practo” has permanent establishment in India .According to Section 165 (2) equalisation levy is not applicable.

      Regarding TDS issue E-Commerce operator is liable to deduct TDS when paying to E- Commerce Participant under Section 194 0. From the explanation under Section 194 O in this case E commerce participant-Doctors as they provide service
      E commerce Operator- Practo .
      Therefore TDS under Section 194O is not payable by doctors / Hospital for consideration paid for listing them under this App.
      There are also paid consultation in Practo app.” Practo ” collects the consultation fees from the patients and remit to the doctors/ hospitals.For this transaction ” Practo” will be liable to deduct TDS .However Practo is not liable to deduct TDS under Section 194 O for the amount remitted by it to doctors who are providing service under individual capacity , if the value of transaction is less than 5 lakhs.

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